Don’t let how you feel about the economy overrule how you feel about investing

For many Americans, 2022 was a very disappointing year with sharply rising inflation and interest rates, falling stock prices and the shock of Russia’s brutal invasion of Ukraine. These factors drove consumer sentiment down to its lowest level on record in June and has only staged a modest rebound since then.

When investors feel gloomy and worried about the outlook, their natural tendency is to sell risk assets. However, history suggests that trying to time markets in this way is a mistake. According to a study of the U.S. consumer sentiment over the past 50 years, with 8 distinct peaks and troughs, and how much the S&P 500 gained or lost in the 12 months following, on average, buying at a confidence peak returned 4.1% while buying at a trough returned 24.9%.

Importantly, this is not to suggest that U.S. stocks will return anything like 24.9% in the year ahead, as many other factors will determine that outcome. However, it does suggest that when planning for 2023 and beyond, investors should focus on fundamentals and valuations rather than how they feel about the world.