How is the Economy Doing Right Now?

Going into December of 2022, we can say that the year has been boring, to say the least. Inflation is high, the stock market has been on a rollercoaster ride, and portfolios aren’t experiencing the massive gains that they have had in the past decade.

Starting the year, the Fed brushed inflation aside and said that they weren’t going to do a lot to tame it. However, they then changed their course, as Andrew Opdyke explained to us in our most recent podcast.

Geopolitical events are the reason for many of the inflation issues that are ongoing.

Ukraine and Russia’s war has led to higher gas prices, and these higher prices have led to an increase in transportation costs, causing food prices to soar. The Fed has raised interest rates numerous times this year to try and cull these rising prices.

Fuel is crucial to:

  • Transportation
  • Production
  • Etc.

Add into this economic update a midterm election, and there’s a lot going on this year, which we want to cover in this economic update.

Fed Will Continue to Drive the Market in 2023

The Federal Reserve is going to be the major driver of the economy in 2023 and 2024, with economists watching what the Fed is going to do closely. A recent CPI report did show inflation easing slightly, and this is a good sign, although Andrew explains one data point isn’t enough to be confident about inflation dropping.

Some of the key points in the report were medical-related, but we do not see prices drop for consumers.

Instead, calculations were adjusted that showed prices falling for medical items, although it doesn’t do much for the average person. Andrew suggests seeing what happens in the next few months and likes to strip away food and fuel costs.

Housing will be a major factor in 2023.

Between 2020 and 2021, housing remained flat, but as we saw in 2022, prices skyrocketed and seemed to have plateaued. Andrew suggests that inflation going from 8% – 5% will be easy, but going from 5% to 2% inflation will likely take 18 – 24 months.

The good news is that the Fed can slow rate hikes down if inflation is slowing down.

Will We See a Recession?

A recession is one of the leading concerns for consumers, and many questions if we’ve already reached a recession. In the first half of 2022, we did have two quarters in a row of slowing, which is the textbook definition of a recession.

However, there is only one group in the world that can officially call it a recession, and that is the National Bureau of Economic Research (NBER). 

The NBER looks at multiple factors when pinpointing a recession, including:

  • Employment
  • Consumer spending
  • Income
  • Production

When you look at the numbers of employment and production increasing at the beginning of the year and strong spending, it’s unlikely that we did hit a recession in 2022.

Raising interest rates is a tool for the Fed to use to fend off a recession, but it takes a long time to see the results of these changes.

Higher interest rates can slow investment, and these slowdowns can have a major impact on the economy. Andrew believes that the Fed is increasing rates at a modest pace and in the middle of 2023, he expected:

  • Unemployment rates to rise, but not like in 2008 or 2009
  • Growth slow for 2 – 3 quarters at a slow rate

Andrew suggests that the slowdown will be like 2000 – 2001 and then back to sustained growth. However, if geopolitical shifts occur, such as China invading Taiwan, then there’s a risk of a longer, more intense recession.

Layoffs Facing Major Tech Companies

Meta has announced massive layoffs in recent days and a few tech companies are also laying off workers. We asked Andrew about these layoffs and if he thinks that they were a result of over-hiring in 2020 – 2021 or if they’re something to be concerned about.

Andrew states:

  • People being home during the pandemic led to higher engagement with Meta, and now that people are engaging less, this is leading to layoffs.
  • Amazon hired to meet the delivery needs of consumers, but with people going back to stores, they need to lay off people.

A slowdown in some areas is leading to an increase in other areas. Companies that have had a difficult time hiring are likely to have an uptick in employees, so the layoffs may not mean as much as people think in terms of an economic slowdown.

Risk of China and Taiwan War

Ukraine and Russia certainly impacted economic recovery and have led to the rise in fuel and food prices, but they make up a very small number of imports and exports. A China and Taiwan war would have a much bigger impact on the global economy.

Taiwan is a major manufacturing hub and a war with Taiwan would lead to a lot of economic turbulence.

Taiwan is relied upon for semiconductors, which are needed for electronics worldwide. Andrew expects a major response from the world’s economy if a war does occur. The world relies heavily on semiconductors, and a China/Taiwan war would have a much higher economic impact.

End of Year Best Guess: S&P 500

If you’re trying to secure your retirement and are in the middle of retirement planning, a major question for the final month of 2022 and going into 2023 is: what is expected to happen in the stock market?

We can only guess about the future of the market, but Andrew believes that we’ll see:

  • Inflation remains a major concern
  • Volatility will remain

However, when the Fed is done raising rates and can cut rates, he expects 2023 to be a wild ride.

In two years and five years, there’s a very good chance that the economy will rise and the stock market will be higher. 

With all of this in mind, 2023 will be less wild than 2022. A lot of the negativity and fear will likely ease going forward. We’re closer to inflation falling, and a lot of investments are being made to prevent negative growth in the future.

For example, over $20 billion is being invested in making semiconductors in the US, and while this takes time, it will certainly be a major economic driver in the coming years. Additionally, the investment will ease the country’s reliance on Taiwan, further reducing the risk of geopolitical issues impacting the US economy as much as it could today.If you want to discuss your retirement plan and help find a way to keep making returns, click here to schedule a call with us.

Economy Forecast for 2022

In our most recent podcast, we were able to sit down with economist Andrew Opdyke to discuss what to expect in the economy in 2022. If you want to listen to the podcast, we encourage you to sign up here.

When you’re working to secure your retirement, the economy will have a major role in how your portfolio will perform.

The forecasts for 2022 are never set in stone, but they can help you get an understanding of what type of fluctuations your portfolio may see this year. However, before we dive into some of the questions we discussed with Andrew, let’s look at what transpired in 2021.

2021: Year in Review

For many people, 2021 was an interesting year because of everything that happened in 2020. At the end of 2020, vaccines came around, and many people viewed 2021 as a recovery year. But unfortunately, we’re still talking about COVID-19 to start this year.

Massive vaccinations have taken place, with signs that the latest wave of COVID-19 from the Omicron variant may lead to less hospitalization.

However, in 2021, we saw some differences in the market, such as:

  • Strong profit growth from S&P 500, small- and mid-cap
  • Emotions led to some volatility
  • Double-digit growth for many stocks

Overall, 2021 was a good year for retirement planning and the market because major companies still posted high profits.

Entering the 2022 Year

Heading into 2022, we’re expecting less of a change in volatility and business going forward. We expect that in 2022, the pace of growth will moderate as businesses want to see if they can get jobs back and continue growing.

With that said, the supply chain is a major concern.

Supply Chain

The world hasn’t seen a supply chain issue like we have had since the pandemic. At the beginning of the current wave of the virus, we’re also seeing supply chain issues that are leading to:

  • Rising inflation
  • Slower product delivery

Large numbers of truckers and other people involved in the supply chain are off work because they’re sick or recently tested positive for COVID. As a result, the supply chain has slowed to start off the year.

However, we see the supply chain recovering.

Shutdowns and shelter-in-place orders are unlikely in 2022, and we expect that this will allow people to continue going to work. We expect 300,000 to 350,000 jobs added per month. If we’re correct, the job figures in 2022 will pass the pre-COVID figures by the end of the year.

Ultimately, we’re still down 3 million jobs to start the year, but it’s widely expected that this figure will continue to drop as we move into the mid-year.

Demand remains very high now. The stimulus helped with this to some extent, so there may be some slowing here. Stimulus checks aren’t coming again, as far as we know, but demand remains incredibly high, which is good for business.

Inflation Predictions

Inflation may continue to rise to start the year. Supply chains are still running, albeit slightly slower due to the recent variant. 

The good news?

In mid-2022, it’s fully expected that inflation will begin to taper off and fall back to traditional ranges of 3% to 4%.

Politics and How It Plays In the 2022 Economy

Politics will always play a role in the national economy, and there are a few things we’re seeing right now that may impact the economy this year:

  • Massive infrastructure bill discrepancies
  • Child tax credit may not be in play

Also, 2022 is a mid-term election year. In November, there will be some disruption in the political sphere which may help or hurt agendas going forward. The infrastructure bill is still in the works, and there’s hope that it will pass in some form.

Adding in infrastructure right now will take a few years to really pick up the pace, even if the bill was to pass today.

Due to a lack of capacity, there’s no feasible way to see crews on the road next week building bridges if the bill passed today. These types of bills and their impact take a while to be put in place logically once they pass into law.

Build Back Better Bill

The Build Back Better bill, which has been tampered down, has a lot of corporate tax hikes associated with it. The closer we get to reelection, the less likely we will see this bill pass. Politicians don’t like to raise taxes during an election year, so it’s a bill that is likely not going to pass in 2022.

Maybe the package passes at $1.5 trillion or less, but if it does, there’s also a good chance of a party change on the House level as a result.

Markets That May Recover Due to a Current Lack of Manpower

In 2020 and 2021, earnings growth numbers were substantial in 2021.

Why?

The drop in earnings in 2020 put the benchmark low and kicked off tremendous growth in 2021. However, 2022 is likely to see growth fall out of the double digits for these companies and back into the 8% to 9% range.

Market growth rates are expected to fall back to typical levels.

Also, price-to-earnings for many companies is expected to really play a factor in stocks readjusting. Many companies saw these values increase on expectations that never materialized.

Of course, there’s also a price concern as inflation rises and perhaps demand falls, leading to better prices for consumers but lower earnings for corporations.

Earnings quality will matter a lot in the coming year.

Small- and medium-sized businesses may also start to come back if we can tame COVID and avoid another shutdown. While mega-caps did well in the past year, these smaller companies are set to come back a little stronger in 2022.

With that said, keep a few points in mind:

  • Markets are unlikely to grow at the same rate as they have over the last 2-3 years
  • Companies with solid profit margins will continue to do well
  • Small- and medium-sized companies may experience the most gains

Expectations of super growth need to be tamed because the high growth is unlikely to continue in 2022 because it really can’t.

Concerns and Expectations for the 2022 Year

Government and Federal concerns exist because the response on these levels will have a major impact on the markets. The response to inflation will be a major focal point because the government downplayed inflation, stating that it was just short-term.

However, we’re now seeing that inflation isn’t short-term and is still sticking around.

The Fed did start to change its tune at the end of 2021. If the Fed addresses inflation, it will help keep the economy high. Unfortunately, if the Fed doesn’t raise the interest rate and tackle inflation, it will lead to market volatility.

We certainly need to keep a close eye on what the Fed does to fight inflation.

If nothing is done to tame inflation, we expect it will significantly impact the markets going into the end of the year.

Surprises and Bright Points in 2021

One of the best points of 2021 was that we learned:

  • People adapt
  • Companies adapt

From an economic growth standpoint, we’re at a new growth high that hasn’t been seen since the 80s. We’re also producing more with 3.5 million fewer workers, so all of these are very bright spots for 2021.

The embracing of technologies and productivity tools will continue to help the market in the coming years.

Earnings growth was real in the past year, but now it’s time to move into 2022 and hopefully return to the fundamentals.

Hopefully, in 2022 we go back to the fundamentals where there are no questions of stimulus, supply chain issues and shutdowns. The last time we’ve seen the money in the system that led to growth was after WWII.

In fact, the funds pushed into the market led to the industrial revolution.

Now, with the influx of cash in the market and government dollars, we may be on the cusp of a new revolution in 2023 and beyond. It’s an exciting time to look at the year ahead and see what companies can make happen with all the money available and in high demand.

The markets may not grow like they did in 2021, but the possibilities in 2022 and 2023 are impressive and should provide long-term, sustainable growth.

Do you need help securing your retirement?

Click here to join our complimentary course: 4 Steps to Secure Your Retirement.

Federal Reserve, Inflation and the Economy

We’ve seen a lot of headlines lately, as we’re sure you have, about the federal reserve, inflation and the economy. At the time of our podcast and writing this, Jerome Powell remains the Fed Reserve Chairman.

One thing we want to make clear is that throughout this article, we’ll be going over recent headlines.

Of course, at the time of reading this, we may have new information or outcomes for these headlines. But the good news is that the information should remain relevant.

What Jerome Powell Being Nominated as Federal Reserve Chairman Means

Jerome Powell is loved by some and not by others. There are two trains of thought here, and these are:

Side 1: People That Like Jerome Powell

A lot of people like Jerome Powell because he likes to print money. He wants to keep the economy moving aggressively, and for some people, they believe printing money will benefit the market.

Side 2: People That Dislike Jerome Powell

On the other side of the spectrum, there are concerns that printing money will cause long-term inflation, which is never a good thing.

Working as a Financial Advisor Through Federal Reserve Chairmen

Since we work with so many people nearly or in retirement, we get a lot of questions from both sides of the argument. For example, some clients want to invest heavily in the market because they believe that Powell will help the market soar, and others want to invest in financial vehicles that rise with inflation.

Our clients want us to forecast the future to try and determine what will happen if Powell is chairman.

For example, a client may ask us:

I’m concerned and excited about Powell’s reinstatement. Can we invest in something that protects against inflation and still reaps the benefits of the market?

Unfortunately, this is a loaded yet common question when dealing with inflation. What we believe is that two things need to be actively managed:

  1. Active investments in the market
  2. Overall retirement plan

Active management is important because trying to predict an outcome for an ever-changing market is a gamble. We would rather not gamble with our clients’ money, so we use the data that we have available at any given moment in time to make smart investment decisions.

Markets and investments can change rapidly in just a day or two, and active management helps our clients avoid major losses in the process.

We have a lot of passionate investors.

For example, some investors learn a lot about a particular company, love the direction and vision of the company’s CEO, and they put all their faith in this individual that they’ll help the company grow.

Unfortunately, there’s a lot of guesswork going into the scenario above that can lead to losses.

Through active management, we invest based on what’s happening now.

If inflation continues to rise and the pressure of inflation exists, we’ll adjust portfolios in three main categories:

  1. Equities, which are stocks
  2. Fixed income, such as bonds
  3. Cash

We recommend putting all three of these categories in a race to see who is winning in today’s market. At the time of writing this, equities are performing exceptionally well towards the end of 2021.

Using a number-oriented form of investing, we recommend:

  • Reallocating investments based on what’s happening now
  • Adjust as required

There are also some sides of the market where people would rather split their investments among the three categories above, so the investor may decide to invest 33% in all three categories and go with the flow.

Instead, we believe active management is the right choice because it reduces the risk of volatility.

Reactionary investing, based on headlines, is not something we recommend. Instead, use data and continue adjusting your retirement portfolio and investments to weather any changes in the market that occur today and 20 years from now.

Events Where Reactive Investing Never Works Out 100%

We’re not going to get political, but when there are presidential elections, there are many people who choose the doom and gloom path. If this Republican or Democrat gets elected, the stock market will CRASH.

Thankfully, these predictions rarely come true.

Making decisions based on assumptions never truly works out how a person thinks. We’ve been through many presidents in the last 20 years. One thing we’ve experienced, and it is rare, is that some people pull all their money out of the market because they believe a new president will cause the market to tumble.

Unfortunately, many of these individuals call us and explain how they wish they didn’t sit on the sidelines because their portfolio may have risen 10%, 20% or even more.

Another scenario is inflation.

Inflation is rising, so a lot of individuals are afraid and believe that the market will flop.

Emotions in the market rarely work out in your favor. As an advisor, we take emotions out of the market and our decisions. For example, even as surges in the coronavirus continue to happen worldwide, the markets remain strong.

Some investors feared that the market would suffer after each surge, much like it did when the pandemic first hit.

Using the data that we have available, we’re not seeing these surges impacting the market, so we recommend keeping money in the market. When the data changes, we’ll adapt our investments to minimize losses and maximize gains.

2020 Events and How We Shifted Money Going Into 2021

In 2020, the S&P 500 fell over 30%, but we did a few things:

  • First, most of our clients were sitting on cash to avoid losses in the market.
  • When reentering the markets, we took it slow and adjusted to the companies winning the race, such as technology companies.
  • January of 2021, we saw a shift where large-cap and technology started to slow and small and mid-cap companies began to revive as the market recovered. Using the race analogy, we adjusted portfolios to include more of these stocks to maximize client gains.

Since this was our first time living through a pandemic, we think we did exceptionally well for our clients and really solidified our thought process that active management is the way to go when investing.

Final Thoughts

We covered a lot in the past sections, and the sentiment remained the same: don’t react over headlines. If everyone could predict the future, we would all enter retirement ridiculously wealthy.

However, we can use the market’s data to make smart, timely investments and portfolio adjustments to avoid losses and ride gains to make the most of our investments as possible.

If you need help actively managing your portfolio or want us to run the numbers to see how we can help you grow your portfolio, schedule an introduction call today.