If there is one thing that can be said of 2022, it’s that there has been no shortage of news headlines to grab your attention. Over the last 12 months, we’ve seen an evolving geopolitical conflict between Russia and Ukraine, inflation at its highest point in 40 years, the Fed increase the Fed funds rate on seven different occasions, and a midterm election…just to name a few.
The resulting market volatility from these events in both the equity and fixed-income markets has been challenging and unsettling at times. Market volatility is predictably unpredictable - we know it’s going to happen, but nobody knows the precise timing or how long it will last.
Let’s recap three meaningful events of 2022 and the impact they may have in 2023.
Inflation:
Inflation peaked at 9.1% in June and since then we saw it decrease for five consecutive months. As of the most recent announcement, inflation sits at 7.1% year over year. This has had an impact on the market not because of the immediate impact on the economy, but for fear of it continuing. While there is a need for it to decrease further, inflation’s downward trajectory over the last few months is an encouraging sign as we head into the new year.
The Fed:
The Federal Reserve’s benchmark interest rate--known as the Fed funds rate--started 2022 at a range of 0.0%-0.25%. We ended 2022 with it sitting at just under 4.50%. This comes after Fed Chairman Jerome Powell announced a .50% increase on December 14th. This marked the seventh interest rate hike for 2022 as the Fed took an aggressive (or ‘hawkish’) approach to try to curb inflation. While it is expected that the pace of rate increases will slow this year, we will not be surprised to see interest rates remain elevated until there is further confirmation that inflation has returned closer to a long-term average over 2-3%.
Washington D.C.:
Republicans have officially taken control over the House of Representatives by a count of 222-213 and Democrats have control over the Senate 51-49 after the November midterm elections. This dynamic presents our country with a split government which means that for the next two years enacting legislation will be an uphill battle - for both parties. We are unlikely to see major legislation that is heavily skewed to one party or the other. Specifically, any tax increases are likely off the table for now, as the attention of both parties is now focused on rallying support for the 2024 Presidential election.
I will end with a quote from the book Psychology of Money, by Morgan Housel:
“Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.”
We resolve and recommit this New Year to keep a long-term perspective on the markets, provide personalized advice, and be mindful of strategic investment, tax, and estate planning opportunities. We care deeply about the clients we serve and the responsibility that comes with providing wise counsel. We look forward to serving you in 2023 and wish you and your family a Happy New Year!
Andrew D. Boyles