Happy New Year!
2022 was a year for the history books! The Omicron variant of the Covid-19 virus sickened nearly everyone, Russia invaded Ukraine, Queen Elizabeth passed away after 70 years on the throne, Hurricane Ian slammed into Florida's Gulf coast, inflation caused prices to skyrocket all over the globe and the stock market ended the year on a low note, firmly in bear market territory.
Inflation took center stage as its impact hit us in the pocketbook with price increases on essentials like groceries, gas and utilities. Arguably the most painful punch from inflation has been its impact on the stock market and the subsequent decline in our investment values.
The S&P 500*, the index that best represents the US economy, was down by 20% by the end of 2022. The Nasdaq, another very broad index that is more heavily weighted towards technology companies, was down by more than 30%. The Dow Jones Industrial Index was down by just under 10%. "The Dow" is often referenced as the indicator that best represents the overall stock market but that is terribly misleading. The Dow tracks only 30 US companies while the S&P tracks 500!
The bond market, usually a safe place to shelter from stock market volatility, was down by about 11% in 2022.
There were a few safe havens that emerged as the stock market declined and interest rates rose. CD's are having a moment in the spotlight with some paying nearly 5% for a one year commitment. iBonds are having a moment too. iBonds are currently paying 6.89% annually. An individual can invest up to $10,000 in iBonds per calendar year. You must hold the iBond for a minimum of 1 year. If you redeem the iBond before 5 years, you sacrifice 3 months worth of interest. Not a bad deal overall. Here is the link to Treasury.gov which is where iBonds can be purchased:
https://www.treasurydirect.gov/savings-bonds/i-bonds/
In response to this year's high inflation, our Federal Reserve has aggressively raised interest rates. The goal of rate hikes is to cool demand so that prices will fall back to healthy levels. You might recall that interest rates were at historically low levels, especially throughout the Covid pandemic. Low interest rates were an important tool to keep the economy afloat while business operations were negatively affected by lockdowns. As life slowly returned to normal but interest rates remained low, demand exploded for goods and services while supplies were low. Inflation is the result of high demand and low supply.
There remains uncertainty over just how many more rate hikes are on the horizon, how much those rate hikes will be and will those rate hikes and the subsequent cooling down of our economy result in a recession. We don't have the answers to those questions as yet which is why the stock market has thus far hesitated to turn around. What we do know is that higher interest rates are beginning to have the desired affect. Prices are coming down. This tells us that there will be an end to rate hikes in the near term and our expectation is that the market will respond favorably. As always, investing is a long term proposition and that means taking the good with the bad. The market will turn around and your participation in that rebound is imperative to the restoration of your account values. The image below demonstrates the importance of remaining invested through market downturns. Since 1932, following every single market downturn, there has been a more powerful market rebound. Hang in there!!
Although 2022 gave us much to fret over, there were plenty of bright spots:
- Russia profoundly underestimated Ukraine's military and resolve. Over the last year, Ukraine has fought back with a vengeance and forced Russian troops to retreat from multiple cities they'd previously held.
- For the first time ever, a drug, now in late stage clinical trials, has been shown to slow cognitive decline in Alzheimer's patients. Lecanemab, developed by Biogen, has recently published clinical trial results that have been described as "a breakthrough." Alzheimer's is the most common form of dementia affecting more than 24 million people worldwide, according to dimentiastatistics.org.
- On July 11th, The James Webb Space Telescope brought us the first color images of galaxies formed after the Big Bang, more than 13 million years ago. The telescope is the most powerful ever sent into space and has sent back stunning images of our universe.
- For the first time in history, a herd of elephants (including 3 calves) currently living in a British Zoo, will be relocated to Kenya and released into the wild.
- In August, the Biden administration announced plans to plant over 1 billion trees across millions of acres of burned and dead woodlands in the Western United States as forests struggle to regenerate naturally.
- Time magazine has named the women of Iran as Heroes of the Year.
Finally, the New Year is ushering in some welcome changes! Social Security benefits have increased by 8.7% this year! 401k contribution limits have increased to $22,500 annually (up from $20,500). For those age 50 and above, the catch up contribution is now $7500 (up from $6500). I will be sending another communication with updates on 401k plans, tax news and investing for retirement....stay tuned! Until then, wishing you a happy, healthy and prosperous 2023!
Warm Regards,
Johanna
*The S&P 500 Index is a stock market index that track's the 500 largest US companies that are publicly traded. Unlike the Dow Jones Industrial Index which tracks only 30 companies.