Getting Ready for 2023

Good Morning,

In just a few short weeks the holidays will be upon us and before we know it, we will ring in another New Year. For many of us, it will be a relief to see 2022 in the rear view. 2022 has been a rough year from a financial perspective. Both the stock and bond markets took a tremendous beating. High quality government and corporate bonds, which are usually reliable hedges against market volatility, are down more than 15% year to date. Healthy companies that are financially solid were caught up in the wave of selling this year. Procter & Gamble, a reliable and stable company that makes consumer staples that we can't live without (everything from soap to paper towels) is down more than 20% this year. The wave of selling has pulled everything along with it leaving the S&P 500 index, the index that best represents the US corporate economy, down by 20% year to date. The Nasdaq, the index that tracks the most important US technology companies like Apple, Microsoft, Tesla, Amazon and Google, is down 30% this year. 

This year's wild stock market ride is mostly due to inflation and the uncertainty over when it will cool down. Theories abound as to why inflation has surged, with most blaming the current administration. That's actually not the case. When our country went into lockdown due to the Covid 19 pandemic, businesses closed, jobs were lost and economic output plunged. Companies cut spending resulting in dramatic declines in inventory. To the delight of everyone, the economy staged a remarkable recovery, mostly due to government aid (cash infusions) and intervention (lowering interest rates). The introduction of vaccines also gave the public the confidence to return to "life as usual."  Record low interest rates fueled demand for everything from appliances and furniture to new cars and homes. Here is where the problem began!  Those declines in corporate spending during the first year of the pandemic meant lower inventories. There was not enough supply to keep up with the demand. When demand outpaces supply, it causes prices to rise. 

The Federal Reserve has been increasing interest rates all year in order to cool inflation. There is finally some evidence that the strategy is working and the market has responded favorably over the last several days. It is widely expected that there will be at least two more rate hikes this year but there should be a pause thereafter. We expect that once inflation subsides, the market will rebound. 

Looking ahead to 2023, there are several changes to report!  Rising inflation has prompted the Social Security Administration to implement an increase of 8.7% to Social Security benefits. This is the largest cost of living adjustment in forty years. The Social Security Administration also said the maximum amount of earnings subject to the Social Security tax will increase to $160,200 in 2023, from $147,000 this year. 

The IRS has increased the amount of money that you can save in your workplace retirement plans in 2023. The employee contribution limit for 401(k) and similar workplace plans will increase by $2,000 to $22,500. For those of us over age 50, the catch up contribution has increased to $7500 from $6500.