2022 is nearly over, and as far as the economy goes, it has been a struggle. This year was characterized by record high inflation and interest rates, with major stock market swings along the way.
Here’s a look back at the main money stories of the year, plus a look at what 2023 might bring.
2022 Review: Federal Reserve Raising Interest Rates
The Federal Reserve has raised interest rates a whopping seven times this year, increasing it from around zero percent at the beginning of the year to 4.5 percent now.
The whole purpose for these increases is to bring down the rampant inflation that we started with at the beginning of 2022. The good news is that these rate hikes do seem to be working. In January, the inflation rate was 7.5 percent. It peaked at 9.1 percent in June, and was back down to 7.1 percent in November.
The Fed announced that it does plan to raise rates even more in 2023, in order to continue bringing down that inflation rate.
Stocks and Bonds Sliding
It’s been a wild ride for markets this year. For the first time in decades, both the stock market and bond market declined simultaneously. Bonds may have had their worst year ever on record. Stocks fell into bear market territory a couple times in 2022, but recovered each time. While the markets have continued to rebound at the end of this year, the year overall was down. The S&P 500 total return was down more than 13 percent for 2022 through November.
The crypto market imploded in 2022, falling from $2.9 trillion to $800 billion in one year. Some of the contributing factors included fraud and mismanagement by crypto lenders and exchanges, along with the increase in interest rates. We don’t know yet what crypto will look like in 2023, but more volatility is expected.
If it was a bad year for your investments, you’re in good company. Returns were down for pretty much everyone. So when you’re reviewing your 2022 portfolio or preparing for the year ahead, know that we will probably experience more of the same, with swings up and down. Hold steady, and avoid impulse reactions. Timing the market is always risky, but it’s especially challenging in the current landscape.
2022 Review and 2023 Outlook
We already know that we’re still dealing with high inflation and more interest rate hikes are on the horizon. But there are some unknowns that loom in 2023 – and some bright spots.
First up, the good news: the job market is still going strong. As of November, employers had added 263,000 new jobs for the month prior, and the unemployment rate remained low at 3.7 percent. That means that employers still have the means to pay their workers and hire new people, which is good news.
But for the Fed, those numbers aren’t quite what they wanted to see. They are actually looking for a weakening labor market, because that would help to further slow inflation. As long as the labor market continues to do well, the Fed will likely not be able to pull back on interest rate increases.
Finally, there is a concern over a potential recession in 2023, which is something we’ve been looking at all year. Anytime the Fed has to increase rates to slow inflation, it increases the likelihood of an impending recession. Spending has to slow down to decrease inflation, but if it decreases too fast, we could end up in a recession. The challenge is that the Fed doesn’t know where that line is until we cross it.
Many economists are anticipating a recession in 2023, though they aren’t sure how severe it might be. As you prepare your goals and plans for the year ahead, consider preparing for a potential recession so you aren’t caught off guard.
Do you need help planning for your financial future? Contact me today to set up a meeting to talk about your goals.