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.