Here are the charts and themes that sum up 2022…
Wild Ride for Stocks
Last year we saw minimal volatility and 2022 was the complete opposite. We’re still in a bear market and it is possible we retest the October 12th lows.
It’s common for bear markets to have increased volatility and so far in 2022 we have seen just that.
Buying Opportunity?
Although historical comparison can’t tell us exactly what will happen, they can help put things in perspective. I find some comfort knowing that buying stocks when they’re down big like this have historically led to positive outcomes.
Here’s the performance of U.S. stocks after previous declines:
Record Inflation
In the past 90+ years, the average inflation rate in the United States has been about 3% per year.
This year, the inflation rate in the United States was as high as 9.06%. The highest we’ve seen since 1981.
Raise for Retirees
As inflation continues to rise, Social Security beneficiaries can expect an 8.7% increase to their benefits starting in January 2023. This is the biggest percentage increase we’ve seen in a calendar year since 1982.
Here Comes The Fed
The Fed has taken aggressive action to tame inflation this year by raising the federal funds target rate by 425 basis points since March. As the following chart shows, this tightening cycle is unprecedented in its pace.
Finally Some Yield
The Fed raising rates has led to yields being up across the board. This means that you can finally earn a decent return on your cash. High yield savings, CDs, and US treasuries are now paying 3% or more.
Bonds Plummet
The combination of rising interest rates and higher inflation has led to a bear market in stocks and double digit losses in bonds. U.S. treasuries are facing their worst annual returns since 1788.
Housing Affordability
The increase in interest rates has made it more difficult for people to afford a home. The median price of an existing home sold has now fallen 10% from its peak in June. This is likely just the start of declines as home prices adjust to 7% mortgages. During the last housing bubble, prices fell 33% from their high.
Car Market Boom and Bust?
After used car prices increased significantly in 2020/2021, prices have since decreased by 15% from their January high. Prices will likely fall further in the coming months.
Stocks Bottom First
It is important to remember that the stock market tends to look ahead and may stop declining even as economic indicators such as GDP, employment, and earnings worsen.
Placing too much emphasis on current events can be problematic for investors because today is already priced in.
The chart below shows six different major economic downturns since 1950. In all six instances, the stock market started rising off bear market lows before the economy turned around.
Bottom Line
2022 has been a memorable year and we hope you will continue to visit our blog for the latest market insights as we move forward. We wish you a happy holiday season and a prosperous New Year. We are looking forward to what 2023 has in store.
Sources / Disclaimer:
US stock returns following declines from YCharts
US Inflation rate from YCharts
Social Security Cost of Living Adjustments from SSA.gov
The Fed is Hiking Further & Faster Than Any Time in Modern History from Chartr
US Bonds annual returns from YCharts
Housing market explained chart from George Maroudas
Used car value index data from Manheim chart from George Maroudas
Worst year for bonds since 1788 from MarketWatch
Chart on market and economic performance during recessions from Eye On The Market, Michael Cembalest, JPMorgan
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
