November 2022 Insight and Thinking Forward

Wow, what a ride these past 6 months. Markets have whipsawed back and forth all year with a -10% decline in March (followed by a rally of more than 10%), then a 22% drop (followed by a 20% rally), only to be met with another 20% drop, which was recently followed by a 10% rally during the month of October. The primary driver of these movements continues to be the Federal Reserve, as they continue to promote restrictive policies to attempt to calm inflation.

Jerome Powell held a press conference yesterday to communicate the latest Fed decision to raise the funds rate by .75%. This brings the current fed funds target to 3.75-4%. This means that, if you are a bank, you can earn nearly 4% by lending your cash overnight to the federal reserve and other banks. By doing this, banks become less incentivized to lend their money to a (relatively risky) consumer, thus raising consumer borrowing costs and slowing the overall pace of lending.

Markets have spent the entire year trying to come to grips with just how far and fast the fed may have to move. Turns out this hiking cycle has been the fastest of the last 7 cycles going back to 1983. For some perspective, on average, it takes 5 months to increase the funds rate by 1%, and 1 year to do a 2% raise. This year, we’ve raised the rates to almost 4% in 11 months, with a raise at every fed meeting so far. Going into the year, markets expected something like 3 hikes total this year, with the average hike being .25%. The idea of seeing a .5 or .75% hike was not taken seriously and changes a lot of the math used to value stocks, bonds, and other assets in a very short period.

On the “bright” side, the economy is starting to show signs of slowing. Mortgage applications this week showed that housing purchases have slowed roughly 8% month over month, and roughly 40% from a year ago. Manufacturing data released this week shows that some key areas of manufacturing are contracting, and we are starting to see stories of layoffs and hiring freezes popping up in select industries. Though this might not sound great at face value, it means that the fed may at some point be able to let up. We are walking a proverbial tightrope hoping for data that is just bad enough, but not so bad that the economy falls into a recession.

Shifting gears, the election is next week. With many projecting that republicans could gain seats in congress, we may have a “lame duck congress” between now and Jan. There are rumblings that the administration may want to finalize a piece of legislation known as Secure act 2.0. Secure act 1.0 was passed in December 2019 and made some key changes to rules regarding required distributions, Inherited IRA distributions, and small employer retirement plans. Secure act 2.0 would be expected to expand on some of these, potentially pushing the required minimum distribution age out further, make some changes to catch-up contributions, and a handful of other tweaks… If this does in fact pass, I will communicate some of the high points and planning potential opportunities.

Thinking forward to 2023, we may be dealing with a split congress and a contentious debt ceiling that looms in the latter half of next year. I’m sure that there is more to come on this as we get into next year, but expect that with higher rates and a lot of government spending in the past few years, things could get a little heated.

As always, we pay close attention to changes in the planning environment and macroeconomic circumstances. Please reach out if you have any questions or concerns, we would be happy to discuss further!