2023 is here and it appears that caution mixed with optimism will be the key attitude to keep as we navigate through the financial waves the year will bring. In this blog, I’ll tell you about the four financial trends we all need to keep an eye on during 2023: Interest rates and inflation, market volatility, the housing market, and recession.

First things first, I’ve said this before and I’m sure it doesn’t hurt to repeat it: investing isn’t always about rapid short-term growth, first and foremost. Yes, steady expansion in your portfolio is great, but the true test of a successful investor is managing through market troughs. Given the conditions in which 2022 ended, it might feel like financial stability is taking an eternity, but the stock market will eventually start to rise again.

As a savvy investor, it’s important to be prepared for this rise by priming your portfolio now. Instead of focusing entirely on growth stocks, for example, explore potential investments that could add value to your portfolio through other means (think pay for you to wait for growth). Think about investments that are good long-term buys and how they’ll pay off once the market changes course upward. Doing these adjustments now could be your return ticket down the line – and you’ll want to make as many smart choices as possible to capitalize on them when the market does eventually grow. That being said, let’s dive into the trends.

1. Interest Rates and Inflation

It’s a classic chicken or the egg scenario. We know inflation is a major factor when it comes to interest rates, and vice versa. As outlined in the Feds dual mandate for their monetary policy, the goal is to manage unemployment and inflation to healthy, targeted levels. When inflation rises, interest rates tend to follow suit, as lenders want to be compensated for lending out money over a period during which the value of the money has decreased. It does not come as a surprise that the impact of inflation on consumers and the economy also dictates how attractive investments become if the cost of everyday purchases begins to rise.

Last year was an unusual period for inflation and interest rates. The percentage change in the consumer price index, jumped to 9.1% in the 12-month period from June 2021 to June 2022 from 1.4% in the 12-month period from January 2020. This caused a ripple effect that’s impacting market growth and creating volatility in financial markets. Many investors are feeling these effects, as it’s become harder to gain steady returns on investments.

Now, we understand that the Federal Reserve is likely to ease the aggressive increases at some point, but we don’t know when this will occur. This unknown element adds additional uncertainty to financial markets, making forecasting a challenge. The European Central Bank recently decided to slow down their interest rate increases, which may be cause for optimism here in the U.S.. In the meantime, investors must take caution and watch for signs of potential danger or opportunity in the markets caused by rising inflation and higher interest rates. We must remain vigilant and make sure all portfolios are optimized accordingly.

Pro Tip: When reviewing your investment strategy, continue to keep bond durations on the shorter end. I am also looking at value over growth when evaluating equity related investments. From a planning perspective, you should also watch out for interest rate adjustments on floating rate debt accounts like credit cards, some HELOCS, and adjustable rate mortgages, to name a few.

2. Market volatility

As the financial market continues to show serious volatility, many investors are feeling apprehensive and uncertain. In fact, market volatility is causing Americans to tighten the reins on their finances, as a Lincoln Financial Group’s survey revealed recently. The study shows that a whopping 88% of respondents saw room for improvement in terms of financial wellness. Also, in an effort to stay prepared and protect not only themselves but also family members, 71% are looking forward to setting some new money goals this year – with 56% focusing on risk protection, 39% on protecting loved ones financially, and 26% on preserving income.

It’s important to remember that, while all these emotions and desires to take immediate action are understandable, panicking will not help you identify or handle the situation in a smart way. The key to remaining calm and reducing your stress when it comes to finances is to build a foundation with proper planning. Establishing clear objectives and understanding ahead of time what goals have the highest priority for you will help you make good decisions that maximize your returns. This is something a CERTIFIED FINANCIAL PLANNER® such as me can help you do. I can provide you tailored advice regarding investment strategies, tax planning, and retirement funds given your unique financial situation. I can also help you identify which assets to focus on and how to diversify your portfolio to protect it from unexpected upheavals. And most important of all, I can also offer you support during difficult times as the markets recover and adjust.

3. Housing

The housing market is also painting a daunting picture for many. Mortgage rates soared in 2022 and while we should expect to see an increase in inventory, home sales have plummeted for an unprecedented 10 months in a row so they’re likely to remain longer on the market. This doesn’t mean that 2023 won’t produce any bright spots. Depending on the location and the income of the prospective buyer, there should still be plenty of opportunities to snag dream homes at affordable prices during this year. But plan your moves carefully, because as the VP of Research of the National Realtors Association told MarketWatch, “Selling and [then] buying a new home means having a 6.5% mortgage rate, so even a trade-down in home size and price will mean a higher monthly mortgage payment.”

If you’re looking for steady real estate dividends down the line this year, then multi-family investments are still attractive, as vacancy rates are historically low and rents are expected to come down from records highs, suggesting that we should see stabilization and growth in this market by the end of the year. In fact, a report by the real estate brokerage firm Savills shows that 39% of property investment in the U.S. is now multifamily. Many multifamily occupants are people that waited to buy a home over the past few years to see things cool down, but now are priced out of the market due to higher interest rates. Many of these folks will continue to sit on the sidelines in the hope that rates and property values go down.

4. Recession

Recession has been on the forefront of most investors’ mind since early 2022 when we first saw the yield curve invert. I think it’s clear that 2023 will be a very interesting year financially. As I’m writing this, the World Bank has issued a communication saying the “global growth has slowed to the extent that the global economy is perilously close to falling into recession.” According to the WB, this new forecast represents “the third weakest pace of growth in nearly three decades, overshadowed only by the global recessions caused by the pandemic and the global financial crisis.” To illustrate it with numbers, the U.S. economy growth forecast dropped from 2.4% to only 0.5%. China went from 5.2% to 4.3%, Japan from 1.3% to 1% , and Europe and Central Asia from 1.5% to 0.1%.

This means the labor market will potentially get weaker as well. Even more, the labor market has seen significant upheaval recently with no end in sight with layoffs impacting many major technology companies. It seems like several times a week I see reports of companies laying off thousands of employees. Interestingly, these layoffs tend to be impacting higher wage-earning middle to upper middle management. On the contrary, lower paying wage earners have seen significant wage growth and job openings are high among these types of positions. Some are calling for a recession that will affect the middle to upper middle class to a greater extent than others.

Which leads me to one last piece of advice: if you have been impacted by layoffs, I would highly suggest speaking with a financial advisor, if you haven’t done so already. Hiring a financial advisor during trying financial times can help you keep things in perspective and make wise financial decisions. If you have been laid off you:

  • are likely to get a severance package that you’ll need to use to bridge the employment gap
  • may incur a surprise tax hit due to vesting schedules and other employee benefits
  • might need to look at alternatives for your 401k or a similar plan.

These are some of the reasons why this is a perfect time to hire a trusted financial planner. Over all, keep an eye on where the economy goes from here and make sure to keep playing smart and remain patient when managing your finances.

To sum things up, your best option right now is to – if you have not done so already – take a measured approach and diversify your portfolio, as circumstances demand. Because if you take the time to do proper planning during an economic downturn, market disruptions like the ones we’re currently experiencing will not necessarily derail your financial security. On the contrary, they could be an opportunity for growth.

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