Most folks know a hangover is an unpleasant experience. The drinks go down easy, and it seems like a good idea at the time. But you pay for it the next day.
In economic terms, 2022 was a very unpleasant experience. Calling last year a hangover would be accurate, but not from imbibing too much alcohol but too much cash.
Let’s rewind a bit …
The Federal Reserve grows the money supply (known as M2) by about 4.5% annually. During the pandemic, M2 – 15,319.1 in December 2019 and 21,490.0 in December 2021 – expanded by a whopping 40.3%. The result of that cash party was price appreciation in nearly every asset class in 2020 and 2021.
By January 2022, the cash party was over, and the economic hangover – led by stronger-than-expected inflation – began to set in. The situation was exacerbated by the war in Ukraine, China’s “zero-Covid” policy and continued supply chain disruptions.
In other words, our economic hangover was worse than originally expected.
- The Fed Funds Rate increased from 0.25% to 4.50% in just 9 months. The fastest rate hike increase ever and more than double analysts’ expectations for 2022.
- The rapidly rising interest rates hammered the markets. According to CNBC, the S&P 500 was down 19.44% in 2022, and the tech-focused Nasdaq was down 33.10%. In 2022, the most secure of all bonds – the U.S. Treasury Security – had its biggest annual decline in the history of the asset class.
If you’re keeping score, 2022 was the worst-performing stock market since 2008 and the worst-ever U.S. Treasury market.
Several bright spots
Despite the continued headache from our economic hangover, there are several bright spots:
- Higher dividends from bond funds. While the bond markets and bond funds declined in 2022, the higher interest rates drove the average dividend in bond funds up over 15%. This will lead to price appreciation once interest rates trend down, which most analysts expect to begin in 2024.
- Many analysts predict peak inflation is behind us. I believe much of the pain is behind us. Gas prices are down 40% from this past summer.
- China has reversed its “zero-Covid” policy. Unlike the U.S., China also eased rates in 2022. It’s quite possible China will once again become a growth driver in 2023.
- A consensus among analysts is the economy will recover in the second half of 2023.While the investment markets almost never follow analyst expectations exactly, the Fed has slowed the pace of rate hikes. That indicates inflation is showing signs of weakening.
SECURE Act 2.0
2022 was not all bad news for investors. On December 23, 2022, with time running out, Congress passed the SECURE Act 2.0 as part of the Consolidated Appropriations Act, a $1.65 trillion omnibus spending package to keep the government running.
The new retirement legislation makes significant alterations to the retirement account rules. Of the 90+ changes to retirement planning brought about by SECURE 2.0, here are five worth noting:
- RMD age increases. Effective January 1, 2023, the age for required minimum distributions (RMDs) from retirement plans increased from 72 to 73. It will increase again to age 75 in 2033. The caveat? Anyone currently subject to RMDs under the old 70½ or 72 rules must continue to follow their existing RMD schedule.
- 529 plans. Effective in 2024, 529 college savings accounts will be eligible for tax-free rollover to a Roth IRA with a per-beneficiary lifetime limit of $35,000. While some special rules apply, the new rule allows a 529 beneficiary to avoid a tax or a penalty by rolling over any “leftover” funds in the plan, even if they have found an alternative way to pay for their education.
- Retirement plan catch-up contributions. Beginning in 2024, all catch-up contributions for folks over 50 and for employees earning over $145,000 annually, must be Roth (after-tax) contributions. But beginning immediately, plans can allow employer matching contributions to be made on a Roth (after-tax) basis.
- 10% penalty exceptions. A slew of new 10% penalty exceptions have been added, all of which have different effective dates. These include distributions for terminal illness (effective immediately), for federally declared natural disasters ($22,000 limit, effective retroactively to 1/26/21), for pension-linked emergency savings accounts ($2,500 limit, effective in 2024), for domestic abuse ($10,000 limit, effective in 2024), for financial emergencies ($1,000 limit, effective in 2024), and for long-term care ($2,500 limit, effective three years from the date the new law was signed).
- Missed RMD penalty exceptions. Effective in 2023, the penalty for failure to take an RMD is reduced from 50% to 25%. If the missed RMD is corrected in a timely manner, the penalty is further reduced to 10%.
I will be following up with research on these and other points. In the meantime, please reach out to me directly with any questions or concerns.
The S&P 500 (Standard & Poor’s 500) is an unmanaged group of securities considered to be representative of the stock market in general. The index cannot be purchased directly by investors. Past performance is no guarantee of future results.