To say that 2022 was a challenging year for the markets would be an understatement. The stock markets saw big losses throughout the year, with high inflation, rising interest rates, and supply chain issues among the reasons that they fell from grace.
I have always been a “tell me the bad news first and the good news second” kind of person. While the news may seem bleak, 2022 wasn’t all bad. There were many planning opportunities that arose throughout the year that can help us take advantage of current market conditions.
Inflation and Interest Rates
With the highest inflation we have seen in nearly 40 years, we could all feel the impact of rising prices. The Federal Reserve set its sights on tackling this problem early in the year, even if it resulted in a higher unemployment rate. The Fed has been true to its word so far, raising rates in the last seven meetings it held in 2022.
While inflation is not going anywhere, higher interest rates have helped to slow the degree to which we are experiencing inflation. The 12-month change in the Consumer Price Index, which measures the rate at which prices increased over the past 12 months, dropped from a high of 9.1% in June to 6.5% December.
Part of the problem as the Fed attempts to manage inflation further is that the job market is still strong. The unemployment rate fell to 3.5% in December, which, prior to earlier this year, was the lowest rate we have seen in over 50 years. Consumer spending has not faltered, which was helped by the strengthening of the U.S. dollar through the first three quarters of the year.
The housing market significantly cooled in 2022. As interest rates have risen, the cost of purchasing a home increased as well. The average 30-year mortgage rate started at 3.1% and increased to 6.4% by the end of the year. For a home costing $750,000, this increases the total cost of purchasing a home by about $535,000. This means that buyers have substantially less to offer to the sellers, slowing the hot market we saw in 2021 where many homes were selling without an inspection required.
Supply Chain Shortages
While we are seeing signs of improvement, 2022 was filled with shortages due to COVID-19 related lockdowns in China and the war between Ukraine and Russia. Europe was incredibly dependent on Russia for natural gas and prices spiked in August as countries attempted to stockpile inventories before the winter. Europe has been reducing its dependency on Russia by importing liquified natural gas from the U.S. and Qatar, but a lack of sufficient infrastructure was an initial problem that has increased costs.
The Used Car Market
Used car prices fell over 8.5% throughout 2022 according to the Mainheim Used Vehicle Value Index due to the increase in supply of new cars. Another sign of improvement is the reduced congestion of cargo ships waiting to unload at crowded ports. The backlog in Southern California was once at a high of 109 vessels but has since been cleared. This should help to curb inflation as well, but it is not the only factor at play.
Should We Expect a Recession?
Many economists are predicting that we will enter into a recession either this year or in early 2024. If you look at the balance of your investment accounts now compared to this time last year, it would be easy to wonder how we aren’t already in a recession. While there are many factors involved in determining this, the common measurement is if the gross domestic product (GDP) has contracted for two consecutive quarters.
In plain English, this means that the total dollar amount of goods and services produced declines for two quarters in a row. This happened in the first two quarters of the year, but with other measurements so strong, it forced economists to reassess. The National Bureau of Economic Research (NBER) is the organization that officially declares when we are in a recession, and it has not yet been declared because of the other strong metrics. This is expected to change course in 2023 as the effects of the slowing economy are realized.
Take Advantage of Current Market Conditions
Reviewing your bank account balance and budget is one way to prepare for the year ahead. Ensuring you have at least three-to-six months’ worth of savings can help you in the event of an unexpected job loss or large expense.
If you already have this, review your budget and determine if you are investing enough towards retirement. Each individual’s situation is different, so how much to invest, and what to invest in, is going to vary. The S&P 500 declined by 18.1% and the MSCI declined by 14.5% last year, and while we can’t know what the future holds, we do know that investors have an opportunity to buy at prices much lower than they were twelve months ago.
Student Loan Debt
President Joe Biden announced plans in August to forgive student loan debt for millions of Americans. The proposal included up to $20,000 in relief for those who received a Pell Grant and $10,000 in relief for those who received other Federal assistance. This has not yet taken effect as questions have been raised about the legality of Biden’s plan.
While the legal challenges aren’t good news for those who hold student loans, payments have once again been paused as the Supreme Court hears the case. When exactly the payments will resume depends on how long it takes the Supreme Court to give their ruling. If we know before June 30, payments will resume 60 days after the court’s decision. If they have not given a ruling by then, the current repayment date is 60 days after June 30.
Secure Act 2.0 Changes
Secure Act 2.0 is bringing about many changes to retirement, but two highlights are the delay of RMDs and some changes to Roth accounts. Congress once again adjusted the age that required minimum distributions (RMDs) begin from certain retirement accounts. For those born in 1951 or later, you don’t have to begin taking RMDs until you turn 73.
Roth accounts also received some good news. Notably, the IRS made no rules prohibiting the “backdoor Roth contribution,” which is a way for individuals above the income limits to make contributions to Roth IRAs. Those with 529 accounts will now be able to roll a portion of their account into a Roth IRA, assuming that they satisfy the many requirements they have surrounding the rollover.
Social Security Increase
The cost-of-living adjustment will once again increase for 2023, this time by 8.7%. It’s the highest we have seen since 1981 and is the second year in a row that we have seen a sizable increase (5.9% last year). This, coupled with the decrease in Medicare premiums, is a welcomed relief for many retirees dealing with the high inflation we have seen.
It may be a challenging year ahead, but it presents us with an opportunity to make adjustments now that can benefit us over the long run. The problems the markets are facing won’t last forever, so as long as we don’t panic and look for the silver-linings, we can make lemonade out of lemons–though it may be more sour than we would all like.