Last year was a financial mess. The markets were tough to negotiate as we experienced unusual issues that were complicated and difficult to understand. Reviewing some of them might help us make better decisions in the future. Although many economic, political, and financial events led to the 2022 markets, I’m limiting my discussion to five critical takeaways.
- Different kinds of investments are subject to specific risks. We often talk about stock market risk, but bond markets also have their volatility. A rising interest rate environment exposes bonds, especially bond funds, to interest rate risk. Bond funds usually decline as interest rates increase. It’s been so long since we have been in a rising rate environment that this decline caught many investors by surprise.
- The US dollar is not on the verge of collapse and is, instead, quite strong. However, that doesn’t always bode well for the stock market because a country’s exports are purchased in its own currency. For example, other countries buy US exports in US dollars. China’s zero-COVID policy and subsequent fewer exports kept the Yuan weaker, while economic issues and the war in Ukraine weakened the Pound and Euro. These weaker foreign currencies led to a stronger US Dollar, which made it more expensive for other countries to buy US goods. Unfortunately, this also caused a decline in the stocks of those companies that produced the goods.
- Inflation is complicated and not always caused by overspending. This year, sanctions against Russia, along with the Chinese supply chain disruption, caused a lack of desired products. Scarcity is at the heart of inflation. When items are hard to obtain, they go up in price. Global inflation ticked up as a result of issues that most countries couldn’t, in good conscience, control.
- The Federal Reserve only has two mandates: controlling inflation and maintaining low unemployment. Additionally, their only tool is adjusting the money supply. By adding money to the economy, the Fed eases monetary policy, while removing money tightens it. Our current economic environment has historically low unemployment rates with disturbingly high inflation. To lower inflation, the Fed must take money out of the economy, and the low unemployment rates don’t create a barrier to these actions. The Fed has several tools, but the most discussed is raising interest rates. As long as inflation stays high and unemployment rates are acceptable, the Federal Reserve will likely continue raising rates, although recent, lower inflation-rate data is hopeful.
- Understand the details of any investment you make, and don’t purchase something because it’s trendy. Although the advice is universally good, it’s more critical when discussing exotic investments. Many people were sadly disappointed by cryptocurrency in 2022 as it did not prove to be a good hedge against declining markets. Instead, the currencies tended to follow the direction of the markets two or more times faster. When markets are rising, this accelerated movement is fun, but it’s painful if stocks are declining. The scandals at the end of the year also make the future of crypto shakier today than it was a year ago. The Sam Bankman-Fried/FTX scandal and subsequent fallout not only cost money directly, but it has threatened additional platforms and currencies as people withdraw their funds. If you want to purchase cryptocurrency, research your investment and maintain appropriate diversification and risk tolerance for your long-term financial goals.
New Year’s articles are often lighthearted and hopeful, and I believe that achieving fundamental financial goals are critical for your success. However, last year presented unique challenges. By understanding them, we can be more successful in navigating choppy financial waters in the future. Happy 2023! Here’s to a less stressful year!