5 Economic Headlines Impacting Your Finances In 2022 And How You Can Prepare For The Year Ahead

From supply shortages to the war in Ukraine, surging energy prices, and the midterm elections, the top news stories in 2022 have been rife with issues impacting your wallet. While inflation has stolen the spotlight for much of the year, the job market remains surprisingly strong, and the stock market appears poised for recovery, following the best October on record. Below we look at five of the top headlines impacting consumers and investors in 2022.

1. Inflation remains stubbornly high

The September Consumer Price Index (CPI) rose 0.4% month-over-month, well above the 0.2% that was expected for a year-over-year number of 8.2%, down slightly from August’s 8.3%. Meanwhile, core CPI (ex-food and energy) soared a huge 0.6% from August versus the 0.4% expected. The year-over-year increase was a fresh 40-year high of 6.7%, up from 6.3% in August. That gave the Federal Reserve (Fed) plenty of room to continue its aggressive rate-hiking regime in October.

The services sector accounted for much of September’s high inflation number, with shelter being one of the biggest drivers, along with large increases in medical care and medical and vehicle insurance. Services ex-energy were up 0.8%, marking the largest increase in 40 years.

That makes sense if you think back to the pandemic when people were buying a lot of goods, but far fewer services. Now things are shifting toward services. Although inflation has remained higher than expected, the good news is that time to delivery, prices paid, most commodities, rents, used cars and shipping costs all suggest that the supply chain/higher prices we’ve been dealing with are improving.1

While inflation impacts all consumers, its’ a significant risk factor for those on fixed incomes in retirement. One of the most effective ways to help protect against inflation and other retirement risk factors is to put a comprehensive financial plan in place and review it regularly with your financial professional. The planning process addresses the risks posed by inflation, market volatility, economic recession and other challenges to help you confidently navigate change and pursue your lifestyle goals at each stage of your life.

2. The Fed increases interest rates for the 4th consecutive time

In its attempt to tamp down inflation, The Fed raised rates by 0.75% for the fourth consecutive time in October, taking the federal funds rate to a target 3.75-4.0% range. According to Sonu Varghese, PhD., Investment Platform Director at Carson Group, the silver lining of an aggressive Fed is that now you can put your cash to work. In a recent blog post, Varghese says the bond market has been anticipating this aggressive pace of tightening, and treasury yields have moved in sync. Short-term yields are a gauge of what investors believe is the path of monetary policy over the near future.

The most recent rate increase comes as the Fed tries to get on top of inflation. As interest rates move higher, investors can get greater yields on bonds. And since the yield curve is inverted, with short-term yields higher than long-term yields, short-term bonds are potentially a very attractive option. They have less “duration” risk, in that they’re less sensitive to interest rate changes, especially if interest rates continue to move higher.

Extremely short-term bonds are more attractive now than they have been in more than a decade and a half. The 3-month treasury yield is currently at 4.2% and the 6-month treasury yield is at 4.6%, the highest yields in more than fifteen years. These “ultra-short” bonds could potentially be used as a potential cash-like solution, especially if you don’t need the cash in the immediate future.2

3. Social Security announces the largest COLA increase since 1981

In October, the Social Security ministration announced an 8.7% cost-of-living adjustment (COLA), the highest increase in 40 years, which is scheduled to take effect on January 1, 2023. That means the average Social Security retirement benefit amount will increase $146 per month, to $1,827 in 2023, from $1,681 in 2022. At the same time, the standard monthly premium for Medicare Part B enrollees will decrease by $5.20 a month to $164.90 from $170.10 in 2022.

Annual COLA increases are intended to provide inflation protection to help retirees maintain their standard of living in retirement. However, for many retirees, even this significant increase may fall short when it comes to buying power. That’s because many are disproportionately impacted by price increases in the healthcare, food and housing sectors where inflation may be higher than the average for all goods and services. If you have the flexibility to temporarily reduce spending until inflation begins to wane, that can be an effective strategy for lessening the impact. That’s not always possible for those on fixed incomes. Another consideration is to reduce the amount you currently withdraw from your investment portfolio and, instead, use cash reserves to pay for current living expenses. This would allow your investment portfolio to benefit as market values rise. Keep in mind that while market downturns have historically been followed by rebounds, past performance does not guarantee future results.

Workers will also want to pay attention to the most recent Social Security changes as well. In 2023, the maximum earnings limit for the Social Security payroll tax will increase by nearly 9% to $160,200, up from the $147,000 for 2022. The FICA tax rate for both employers and employees will be 7.65% (6.20% for OASDI and 1.45% for Medicare). (Also, as of January 2013, individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly) pay an additional 0.9 percent in Medicare taxes.) Keep in mind, if you need to adjust your withholding for 2023, plan to do so before the end of the year so that your new withholding rate is effective in January.

4. 2022 is a banner year for job growth

This year has shown significant strength and resiliency in the labor markets. September unemployment fell from 3.7% to 3.5%, going in the opposite direction of what Federal Reserve officials expect amid their interest rate hikes. Following the Fed’s fourth rate hike of the year, October unemployment moved up slightly to 3.7%, hinting at slower economic growth. However, at the same time, nonfarm payrolls grew by 261,000 in October, better than the estimated 205,000. While payroll growth has slowed over the last few months, from 537,000 in July to 315,000 in August and then 261,000 in October, these are robust numbers. Even if the economy failed to create any new jobs over the next year, 2022 would be the ninth best year for job creation since 1940 with 3.8 million jobs created through October. If the 4th Quarter sees another 500,000 jobs created, 2022 would end up as the second-best year behind 2021, which was boosted by the COVID recovery. 3

With the job market tilted in favor of workers, this has allowed employees and job seekers to maintain the upper hand in negotiating for better pay and benefits. If you’re among them, consider using all or a portion of a recent raise, bonus or promotion to boost retirement savings before year end. If you participate in an employer plan, such as a 401(k) or 403(b), you can contribute up to $20,500 in 2022, and an additional $6,500 in catch up contributions if you’re age 50 or over. In 2023, those amounts go up to $22,500 and $7,500, respectively. If you’re not able to maximize contributions this year, try to contribute enough to receive employer matching contributions if your plan offers them. That’s free money you don’t want to leave on the table, especially in today’s economic climate.

5. Stock market posts best October return—ever

The Dow Jones Industrial Average began trading on May 26, 1896, and it just had the best October return ever, up 14.0%. This was the best month since January 1976 and third best month overall since World War II. Should you expect to see more of the same?

Midterm years tend to see weak stock returns in the first three quarters and that has certainly played out in 2022. However, the fourth quarter of a midterm is historically the second-best quarter out of the full four-year Presidential cycle. While October is the best month in a midterm year, November is second and December is third best.4 Historical trends point to the best quarter and third best quarter being right around the corner early next year. As bad as things have been so far this year, the calendar is a major tailwind currently. The fourth quarter typically does even better when September is down big. Given that we saw one of the worst Septembers ever for stocks this year, this could be another clue that a bounce back is possible.5

If you’re managing your own investment portfolio, this may be a good time to consider rebalancing to ensure your asset allocation and risk parameters remain aligned. Regular rebalancing, which is more complicated than many people think, is one of the many benefits of professional portfolio management. Professional portfolio managers and analysts have the luxury of focusing solely on asset management and have access to the tools, resources and data required for a disciplined approach to making decisions about when to get in and out of certain securities, sectors and asset classes, and how to adjust holdings to optimize your portfolio so it remains aligned with your personal goals.

One thing we can predict with confidence is that 2023 will bring unforeseen headlines of its own, which will include new opportunities and challenges for savers, investors and those living in retirement. A comprehensive financial strategy that is aligned with your goals and risk tolerance can provide the framework needed to help manage change and help you move forward with confidence in the new year.

To learn more about the benefits of a disciplined approach to asset management, download our complimentary guide, The Importance of Process in Your Investment Strategy.

1 “Everything You Wanted to Know About The CPI Report But Were Afraid To Ask,” 10/14/22

2 “The Silver Lining of Another Fed Rate Hike,” 11/03/22.

3 “5 Charts That Show the Strength of the Labor Market,” 10/13/22

4 “7 Things to Know About the Historically Strong Fourth Quarter,” 10/07/22

5 “The Best October for The Dow Ever,” 11/01/22.

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