With a new year comes new possibilities. 2022 was a challenging year for investors, to say the least. An exuberantly robust economy and low unemployment rate, couple with years of quantitative easing by the Federal Reserve, has fueled inflation to a 40 year high. In an attempt to cool off the economy and dampen inflation, the Fed has aggressively raised interest rates 7 times throughout 2022, with a total increase of 425 basis points which equates to a 4.25% interest rate hike, which is roughly where the yield on the two-year treasury is trading.
As rates rise, bond values typically fall. And in this case, stock prices have fallen as well, in tandem, as analysts have revamped their earnings outlooks to the downside. It is inevitable that, at some point, this monetary tightening is certain to slow down economic growth, right? The trick is, can they do it without sending us into another recession? Though we "technically" have been in a recession, since the first two quarters of 2022 reflected by negative GDP (gross domestic product) growth, which is the academic definition of a recession.
We have seen historically and unusually low interest rates for almost 2 decades, since the economy grappled with the great recession. Well, now, we're finally experiencing a return to normal. Yes, borrowing costs are up, the housing market is cooling, earnings outlooks are slowing, but at the end of the day, it's business as usual. Corporate America will adjust. Times like these, demand companies cut the fat and eliminate excesses. This "cleaning up" is a healthy process on the path to the next economic expansion.
The one silver lining I can see, is there is now, finally a respectable place for ultra conservative investors to invest. Currently, with 6-month CD rates around 4.5% it offers retirees a place to earn a reasonable rate of return without any risk, finally! However, there is still a quandary. As the cost of living is rising (measured by CPI - the Consumer Price Index) a 4.5% CD is losing buying power to the rising costs of goods and services, when inflation is running hot at 8%. So, a carefully thought-out retirement plan, still needs to consider the long-term impact of inflation and utilize assets that can outpace it.
At some point, I'm confident inflation will tamper down, and the economy and the stock market will make a resurgence. In the meantime, patience is paramount. If you have questions or concerns about your investments, give us a call at 386-299-2893.