What Investors Can Be Grateful for This Holiday Season

As we enter the holiday season, it’s a good time to think about what we’re grateful for in both our personal lives and our finances. Investors often worry about what might go wrong instead of celebrating what has gone well. Right now, with markets doing well, it’s useful to look back at the past year to understand where we stand as we face new challenges and opportunities ahead.

Financial markets have provided good returns over the years, and this year has been strong as well. The S&P 500 (a measure of 500 large U.S. companies) has gained over 15% including dividends so far this year. Bonds (loans you make to companies or governments) have returned about 7% as measured by the Bloomberg U.S. Aggregate Bond Index. International stocks have done better than U.S. stocks for the first time in many years. Many portfolios that hold a mix of investments have benefited from these positive results across different types of investments. What should investors think about as they look ahead to next year?

The bull market is now in its fourth year

First, investors can be grateful that financial markets have done well this year even with some ups and downs along the way. This bull market (a period when markets are rising) started after markets hit bottom in October 2022 and is now in its fourth year.

While what happened in the past doesn’t tell us what will happen in the future, history shows that bull markets usually last much longer than bear markets (when markets are falling). Bull markets often run for five to ten years or longer. The average bull market has delivered much larger total returns than what we’ve seen so far in this cycle, even though investors faced many challenges during those times. While there are real concerns about how expensive stocks are and how concentrated the market has become in a few large companies, long-term investing means staying invested through all kinds of market conditions.

It’s worth noting that bonds have also provided positive returns after a difficult few years of rising interest rates and inflation. As rates have stabilized and the Federal Reserve (the central bank that manages U.S. monetary policy) has started lowering interest rates again, bond prices have gone up. This shows why holding both stocks and bonds is important for portfolios in terms of both balance and generating income.

This strength highlights an important idea: trying to predict markets based on short-term events is not only hard, but can hurt your results if it’s not part of your overall financial plan. This was true even in April when markets fell close to bear market levels as new tariffs (fees on imported goods) were announced. Markets not only bounced back quickly but reached new all-time highs. Investors who stayed disciplined were rewarded, while those who reacted to news headlines may have missed opportunities and, in some cases, may still be sitting on the sidelines.

Inflation has gotten better and the Fed is lowering rates

Second, investors can be thankful that inflation (the rate at which prices rise) has improved, even if the progress has been slower than many hoped. Prices have gone up about 3% over the past year, which continues to be difficult for households and policymakers. However, from an investment perspective, inflation has been much more stable, and there are fewer concerns about rapidly rising inflation compared to earlier years.

This has allowed the Fed to start lowering interest rates after keeping them at high levels for most of the year. This is also to help support the job market, which has been getting weaker since the summer. Historically, lower rates help both stocks and bonds by making it cheaper for businesses and consumers to borrow money, while making existing bonds with higher interest rates more valuable. So, even though inflation and interest rates will continue to be important for markets, fears of constantly rising inflation and interest rates seem to be in the past.

Spreading your investments across different types helps manage risk while capturing opportunities

Finally, investors should appreciate the importance of ongoing risk management and proper asset allocation (how you divide your money among different types of investments). The year ahead will likely bring new uncertainties just like every year does. When this happens, there will naturally be concerns about recessions (economic downturns), bear markets, and whether this positive cycle may be ending. Rather than reacting to every market event, long-term investors should hold an appropriate mix of investments that can handle different phases of the market and economic cycles.

We can also be grateful that we have different types of investments available to help balance risk and potential returns. Managing risk is important at all times in an investor’s journey, especially after a three-year rally. The S&P 500 price-to-earnings ratio (a measure of how expensive stocks are) of 22.6x is above average and getting closer to its peak levels during the dot-com bubble.

This measure of valuation doesn’t predict what the market will do in the short term, so this doesn’t mean markets can’t continue doing well. However, it does suggest that future returns might be more modest, especially when compared with cheaper types of investments and market sectors. Therefore, it’s important to have realistic expectations and to hold different parts of the market that have more attractive valuations.

Questions about artificial intelligence will continue. It’s natural that the impact on stock prices is hard to predict given how transformative the technology is. This is similar to the challenges of predicting how the internet revolution would unfold starting in the mid-1990s. Political uncertainty is also likely to continue with ongoing tariff changes, global tensions, the growing national debt, and more. Recent history shows that overreacting to these events is not only unhelpful but can derail your financial plans.

The bottom line? The holiday season is a great time to think about the many reasons to be grateful and to review how your portfolio is allocated. A well-constructed portfolio balances the benefits of different types of investments and aligns them with your financial goals. This remains the key to handling challenges and opportunities in the year ahead.