2022: A Year to Forget?

1/17/2023 - By Chris Stennett, CFP

At the end of each year, we like to reflect on what transpired in the previous 12 months. The general tenet of last year’s article was that it was a year to remember for investors as stocks soared again. In contrast, this year was one many investors would like to forget. While we recognize the challenges this year brought, we feel it’s important to look back at what made this year so historic.

Losses in Stock and Bond Markets

US Stocks (S&P 500) finished the year down -18.1% while Bonds (Bloomberg Aggregate Bond Market) finished down -13%. When you factor in the returns for 10-year U.S. Treasuries, down more than 15%, you have the worst year for bond investors ever. Investors with a 60% stock/40% Bond portfolio experienced the 3rd worst year on record, down -16.9%. 2022 was an exceptionally painful year for all investors. While there were many contributing factors, two of the key reasons were persistent inflation and rising interest rates. 

40-Year High Inflation Levels

In late 2021 the US Consumer Price Index, used to quantify inflation, rose dramatically. That trend continued into 2022 with CPI reaching 9.1% in June. The last time investors experienced inflation at these levels was when Ronald Regan took office in 1981. A host of factors contributed to inflation, as the US money supply increased, as did the demand to spend by consumers. Coupled with persisting supply challenges related to the pandemic shut-down and higher labor costs, it’s easy to see why prices on most goods surged. To combat high inflation, the Federal Reserve began to aggressively raise interest rates.

Historic Interest Rate Rises

Interest rates represent the cost of borrowing. In an effort to reduce inflation and tighten the money supply, the Fed began raising the Federal Funds rate in early 2022. This overnight lending rate ballooned from .08% to 4.33% at year-end. For context, a 4.3% rate is a historically normal rate and is nowhere near the 20% rate of 1980. However, the speed of the increase, from essentially 0% to 4.3% in a year, created a great deal of pressure on existing bond prices and significantly contributed to the year’s losses. Fortunately, higher interest rates translate into more yield opportunities for bond investors. Additionally, during the last four months of 2022, CPI dropped, showing signs that inflation may be slowing. Unfortunately, the rapid change in interest rates created a challenge in the US real estate market. 

Stalling Real Estate Market

Prior to this year, the housing market had been red hot as the pandemic helped to accelerate 10 years’ worth of housing market gains into an 18-month period. This all changed when the Fed began raising interest rates, as mortgage rates for new loans climbed from 3% to just under 7% in one year. That meant that at the beginning of this year, a homebuyer who could have previously afforded the monthly payment on a $350,000 home, can now only afford a $200,000 home. Unfortunately, the previously mentioned home price acceleration meant that first-time homebuyers were either priced out of the market or unable to find inventory they could afford. To make issues worse, home sellers were faced with a precarious choice: they could sell their home at a lower cost relative to the past two years to match demand or stay in a place they expected to leave. Additionally, once they sold their home, they likely would need to find a new home (at higher mortgage rates) creating a stalemate. Unless sellers were forced to sell due to job relocation or other unavoidable circumstances,  they had no incentive to list their property.

Strong Labor Market

Fortunately, there are some things that did go well in 2022 –  the labor market being chief among them. At the end of 2022, there were approximately 1.7 jobs available per unemployed person. Even if we assume that half of these postings are duplicates related to remote work, there are jobs available. Employees have been advantaged for the first time in decades as job switches saw a 20% increase in nominal wages (or a 10% increase in their real wages, net of inflation). 

Value Shines

Another bright spot on the year comes from the performance of value stocks, relative to growth.  US Growth Stocks finished the year down -25.4% (S&P 500 Growth) while US Value Stocks finished the year down -4.8% (S&P 500 Value). A key principle of our investment philosophy emphasizes value investing to achieve higher expected returns over time. While 2022 returns were negative across the board, value tilts in portfolios helped dampen the pain.   

SECURE Act 2.0

In the final days of 2022, Congress approved an omnibus spending bill that includes retirement-related provisions known collectively as the Secure Act 2.0. The original SECURE Act was written into law almost exactly three years prior and was meant to increase access to retirement savings for Americans. The SECURE Act 2.0 aims to build off the previous bill’s success and introduces some important improvements to how Americans save for retirement. You can read more about the new law here.

While 2022 is a year that many investors would like to forget, we look at it a little differently. From a historical standpoint, this year will stand out among some of the major market years like 2008, 2002, 1974, 1937 and 1931. While these were all very traumatic moments for investors, they also brought valuable lessons about the importance of risk management and the principles of growing wealth over time. 2022 put an end to wild speculation that arose during the pandemic and manifested into cryptocurrencies, NFTs, Meme stocks, YOLO trading and SPACs. Call it what you will, Normalization, the Great Reset or the Great Inflate – 2022 will be a year investors will never forget.

About the Author | Chris Stennett, CFP®

Chris is a senior financial advisor and Certified Financial Planner® practitioner for Saltmarsh Financial Advisors, LLC, an affiliate of Saltmarsh, Cleaveland & Gund. He serves individuals and organizations as a comprehensive financial planner and coordinator of investment activities. His areas of expertise include investment management, income planning, tax and estate planning and risk management. Chris has over a decade of experience as a wealth manager working with teachers, federal and state employees, retired Armed Forces and private-sector employees.

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