If 2023 has taught us anything about investing, it’s that predicting the future is like looking into a broken telescope and pointing it at the sun. It offers a distorted view of what could either be bright or fiery times ahead. If you were listening closely to the projections being made at the beginning of the year, you’d be forgiven for expecting an undesirable outcome. There were many negative predictions expected for the year, yet here we are closing the year in an arguably better state.
Flawed Predictions
So why were these predictions so wide off the mark? First, it can be agreed that economic projections are often incorrect. That’s just a fact, as no one can predict the future. Secondly, many of the worlds recent events have been unprecedented: the equivalent of curve balls being thrown at projection models built on historical events. When current events do not corroborate with previous ones, these models ultimately become invalid.
What Happened?
The common perception is that when central banks raise interest rates to battle inflation, borrowing money becomes expensive. This then results in people not spending money and can ultimately pave the way for a recession. Only that didn’t entirely happen this year. Yes, interest rates continued to rise towards the end of 2022 and into early 2023. However, here comes the first curve ball: spending didn’t stop. In fact, spending increased among consumers, especially from low-income households. Money had accumulated during lockdowns, and government support for small businesses preserved economic conditions, thus maintaining consumer spending behavior in addition to the extra costs of inflation hikes.
Furthermore, unemployment rates are also correlated with consumer spending. We’ve already established that spending did not decline this year, which also saw the labor market soar as a result. So good was the labor market that wages increased, and employees were even comfortable enough to make further demands on salaries and working conditions.
The bottom line is that spending represents the largest driving force of the global economy. Even a small downturn in consumer spending can damage the economy. Most of the negative predictions made for this year were rooted in expectations of decreased spending but, fortunately, people have proven to be more resilient than originally expected.
Tuning Out The Noise
Staying informed about economic forecasts is wise, but being aware doesn’t mean acting on every piece of news you hear. Projections are essentially well-informed guesses, but they’re still just that – guesses. 2023 in particular is a prime case for why you should not always trust forecasts, a recent and relevant example of why you should commit to your long-term financial goals.
Stay focused on your financial goals by ignoring speculation and adopting a strategic investment mindset. Once you have established the right temperament for investing and embrace the fact that volatility is normal and expected, even periods of heightened unpredictability become manageable.
Part of this investment mindset is sticking to a regular investing plan (dollar-cost averaging), regardless of market performance. This can help you navigate market dips, minimize risks, and to protect the total value of your investments over time.
So, to those who have stayed committed to their goals and stood resiliently against a backdrop of negative professional predictions, congratulations on adopting the right mindset and staying true to your long-term investing goals.
