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Please read the information below. By accessing this web site of Thornburg Investment Management, Inc. ("Thornburg" or "we"), you acknowledge that you understand and accept the following terms and conditions of use.

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Markets

2022 in Perspective

Jan Blakeley Holman, CFP, CIMA, ChFC, CDFA, CFS, GFS
Director of Advisor Education
24 Jan 2023
3 min read

Inflation, rising rates, and geopolitical events wreaked havoc on markets last year, it’s time to put those events, and your investments, into perspective.

Finally, 2022 is history. At the beginning of a new year, tradition says we should wash away the past. Before we do, let’s revisit 2022 and put the year into perspective.

Investors began 2022 in a tentative mood. Still reeling from a year of rampant inflation, we wondered what the new year would bring. It didn’t take long to find out.

In February, Russia invaded Ukraine, need I say more?

In March the Federal Reserve began raising interest rates to slow consumer demand and rising prices. By the end of the year, they had raised interest rates 7 times for a total of 4.25%. For borrowers, especially consumers looking for homes, the result was exceptionally discouraging as the average 30-year mortgage rate increased from 3.05% in December of 2021 to 6.88% in December of 2022.

Throughout 2022 the equity markets wildly gyrated. The S&P 500 ended the year down 19.44%, its biggest downturn since 2008. The bond market, as measured by the Bloomberg US Aggregate Bond Index, dropped more than 13%. The worst bond performance on record. But as bad as the bond market performed, nothing compared to the collapse of digital currency (cryptocurrency) market. By year-end, the best known crypto, Bitcoin, had fallen to $16,933, a whopping 76% below its peak price of $66,934.02 on November 9, 2021, a shock for investors many of whom were wiped out.

By November the annual inflation rate was 7.1%. Although it was a bit higher than 2021, we were relieved it wasn’t worse since seven out of 2022’s twelve months prices increased more than 8%. As we begin the new year, the jury is still out on whether the Fed’s rate increases will have a meaningful long-term effect. We’ve been told to expect more rate increases this year, which is more bad news for borrowers.

While 2022’s results are disappointing, there were positives. Here are two of the most significant:

  • Dollar-cost Averaging Pays Off
    The S&P 500 increased by 26.61% in 2021. During 2022 it fell by more than 19%. While painful in the moment, over the long-term, market volatility is a plus for investors who regularly move money from an investment that does not fluctuate in price into one that does.Regularly investing the same amount at regular intervals and buying at various prices is called dollar-cost averaging. Using this strategy, you buy fewer shares of your investment when the price rises and more shares when the price falls. The “averaging” aspect becomes evident when you calculate your average price per share ($ amount invested /# of shares owned) and find that your average price is lower than its prevailing market price. Dollar-cost averaging is the benefit of staying the course and remaining invested during good and bad markets.
  • Inflation Works for Us Too
    When prices rise, consumers immediately notice the effect of inflation on the goods and services they regularly use. For example, during 2022, the highest average price per gallon of gas in the U.S. was $4.99. Significantly higher than the $2.90 average price per gallon we paid between 2018 and 2022. Every time we filled up the tank and it cost us more, we experienced the pain of inflation.While inflation’s negative effect on our day-to-day finances is always clear, it’s positive effect it has on our future finances, is not. Take the case of Social Security. After tracking inflation throughout each year, the end of every year the Social Security Administration announces a COLA (Cost of Living Adjustment) that will be applied to each account. The COLA’s purpose is to ensure the purchasing power of our Social Security benefits isn’t eroded by inflation. In 2021 a COLA of 5.9% was applied to every recipient’s monthly benefit. During 2022 the Social Security COLA was 8.7%.

    On the surface it appears that the annual Social Security COLA is only important to those who are currently collecting benefits, but that’s not the case. Just as Social Security’s annual COLA increases current benefits, it also increases the Primary Insurance Amount (PIA) of every individual’s Social Security Account, which is a significant variable in determining our future benefits.

We’ll soon see what 2023 brings, but it’s safe to say the year won’t be boring. Remember, if you have long-term investment goals, you must have a long-term investment mentality and, to the extent possible, not be affected by day-to-day market volatility.

If you’re looking for additional direction, Thornburg’s investment professionals have ideas on what you can expect this year. Reach out to learn more about our 2023 Outlook.

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