This past year was a reminder that it is much easier to stick with your investment plan when financial markets act as expected, when annual returns are within range, or better than anticipated, and market volatility is low.
2022 was far from easy
Instead, 2022 was a test of discipline and patience, and a time when having a plan helped maintain perspective when both stock and bond markets experienced significant negative returns and dramatic price fluctuation along the way.
In free capital markets, combined downturns in both stock and bond markets can only happen temporarily, and generally in times of rising inflation which we experienced in 2022. In the bond market, the rapid rise in interest rates as the Federal Reserve struggled to get inflation under control resulted in a historic drop in bond prices. Having weathered these bleak market conditions, there are some positive indicators heading into 2023.
Inflation and interest rate increases expected to slow
The good news is that recent inflation data shows a downward trend, with December CPI falling to 6.5% annually from 7.1% in November. With a more positive outlook for inflation, The Fed has signaled that the pace of increases will be slowing. The current Fed funds target range of 4.25% – 4.5% is expected to increase only marginally in 2023, to 5% – 5.25%. At these levels, there are opportunities for attractive low-risk yields for investors.
The S&P 500 Index historically bounces back after a down year
Also, history tells us that since 1928, the S&P 500 Index has only fallen for two straight years on four occasions: The Great Depression, World War II, the 1970s oil crisis and the bursting of the dot-com bubble in the early 2000s. So, another down year for this stock benchmark would be an outlier, though not impossible. Even with the threat of a recession still looming, we know that a recession may not mean further bad news for equities, which tend to hit bottom before a recession starts, as we noted in our letter last quarter. (Learn how to recession proof your portfolio.)
SECURE Act 2.0 may help improve retirement saving
Investors also received some good news in the form of the legislative approval of SECURE Act 2.0 at the end of 2022. This new law provides greater incentives for individuals to save for retirement, and more flexibility in saving for college in 529 plans. It also requires company retirement plans to include features that increase savings, which may help with planning and investing.
This article is a reposting of the Q4’22 quarterly letter we send to our clients. We feel it is important to share our perspective on the economy for everyone’s benefit. If you are interested in learning more about the economy and market trends and what they may mean for the year ahead, tune into our Quarterly Context Webinar where our CEO Greg Patterson separates the news from the noise to help you make better decisions.