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2022: Year In Review


Volume 93 No. 12 - December 2022


12-2022 Newsletter
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In many ways, 2022 represented a return to many of the elements of normalcy we sometimes took for granted before the pandemic. Although public health concerns and Covid cases are still very much with us, this year, businesses continued to reopen and people began to travel again for both work and leisure.


The pandemic and its health, social, and economic effects remain with us nearly three years after COVID-19 first emerged, but we can now envision what the end of this pandemic era may look like, as well as the challenges we will have to clear before we get there.


Although the stories of eras are often written within the scope of multiple years and even decades, they each contain, at their smallest increments, the months and years through which we all live. So, when we look back at 2022, what were the major trends and storylines that bring us to where we stand today, as we prepare to turn the calendar to 2023?


The Economy


The robust economic recovery we saw in 2021 stalled earlier this year. By August, the U.S. economy had sustained two quarters of negative growth of gross domestic product (GDP) —the technical definition of a recession. In our August 2022 newsletter, we explored what recession means for the economy, our individual finances, and how we adjust our investment strategy during this stage of the business cycle.


Q3 brought promising economic news, however. The U.S. Bureau of Economic Analysis reported that real GDP grew at a 3.2% annual rate for the quarter ended September 30, reflecting growing exports and consumer spending that was partially offset by decreasing investment in housing.[1] Currently, estimates indicate that full year economic growth for 2022 will be in positive territory.


Regarding the labor market, while unemployment continued to hover in the 3.5% to 4.0% range, average hourly earnings inched up 5.0% for the twelve months ended November 30, 2022. Regarding prices for goods and services, the volatility of oil prices, exacerbated by Russia’s invasion of Ukraine in late February, played a significant role in the uncertainty of prices of just about everything in our economy this year—even a slice of pizza, as we explored in our May 2022 newsletter.


However, as we close out the year, the forces that caused the price of a barrel of crude oil to rise over 70% to a one-year high of $119.65/bbl. in late March ebbed. As of this writing, that barrel of oil costs only about 10% more than in late 2021.


The trillions of dollars of stimulus funds that helped us fend off “the worst economic effects of the pandemic for many” in 2020 and into 2021 have begun to fade, as inflation is now top concern for the economy and markets. In short, the impact of tighter monetary policy on the economy is now top of mind for investors and the market.

Inflation and Interest Rates


2022 will go down as a year of prolific interest rate hikes. This year, the Federal Reserve (the Fed) has raised the fed funds target rate seven times, from near-zero to 4.25-4.5%. We wrote about the coming and widely anticipated interest rate hikes in March. We looked for parallels from the high-interest-rate years of the 1970s and explored how increasing interest rates could curtail the persistent rates of inflation we have seen this year.


The Fed has been raising interest rates to try and slow down the economy and remove the fuel for inflation, which has come down for several months in a row now after peaking at a 9.1% (headline consumer price index) annualized rate in June. The Fed is committed to bringing down inflation and is expected to raise interest rates further in the first half of 2023. Inflation continuing to come down remains critical for the economy and markets.


In May 2022, we wrote about the insidious and pervasive effects of inflation, examining how increases in the cost of inputs like energy and other raw materials result in increasing prices of commodities and eventually flow upward through the entire supply chain. As we stated in this newsletter, supply chains have begun to improve in the second half of the year.


In September, we returned to the topic of the rising price of inputs and focused on labor, increasingly in short supply as we progress through the pandemic era. We examined the mismatch between the 11.2 million unfilled job openings in the U.S. at the time and the 6 million people available to fill them. Beyond the reasons we explored for the labor shortage, one theme remained clear—the basic concept of supply and demand was also exerting upward pressure on the cost of labor and fueling inflation. An increase in labor force participation in 2023 would help to narrow this disparity.


Looking ahead to ‘23


We look ahead to 2023 with tempered optimism. Even as the pandemic wanes and life returns to normal across the various spheres of our lives, we live with the uncertainty that current trajectories could take us in a variety of directions.


Even as many circumstances that will determine the course of 2023 remain to be developed and resolved, we remain optimistic that, there is plenty to be encouraged about.

Our economy is still enjoying historically low unemployment. Industrial production remains encouraging, and the price of oil has come down from its 2022 highs. Also, the end of these historic interest rate hikes seems to be in sight.


We are cautiously optimistic about 2023, encouraged by some indicators while we watch others. Going into the new year, we expect that the main economic battle will be finding the right balance between rising interest rates, bringing down inflation, and managing the economic health of the nation.


As we always have, we will continue to monitor economic news and make the appropriate decisions needed to keep our approved stock list relevant through all stages of the business cycle.


We wish you nothing but the best for 2023. Happy New Year to you, your families, and loved ones from all of us at Investment Counsel.



Inside the Office


Todd has recently achieved the designation of CERTIFIED FINANCIAL PLANNER™ (CFP®). The CFP® designation is widely considered to be the highest achievement in the financial planning profession. The requirements for designation span four aspects: Experience, Education, Ethics, and Examination. The topical areas covered on the required examination include investment planning, retirement planning, tax planning, and more.

Todd adds this credential as he continues in his role as Portfolio Manager, serving clients through investment research, portfolio management, and client service.

This achievement adds to the depth of knowledge and expertise at our firm, joining Aaron as a CFP® professional. Todd, Aaron, and Chris will continue to apply their knowledge and skills through excellent client service and portfolio management.

Congratulations to Todd.

[1] https://www.bea.gov/news/2022/gross-domestic-product-third-estimate-gdp-industry-and-corporate-profits-revised-third#:~:text=BEA%2022%E2%80%9464-,Gross%20Domestic%20Product%20(Third%20Estimate)%2C%20GDP%20by%20Industry%2C,the%20Bureau%20of%20Economic%20Analysis.

 

Investment Counsel Inc., a Division of LaFleur & Godfrey, is a registered investment adviser. Registration does not imply government endorsement or that the advisor has attained a level of skill or training. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. *This newsletter was offered by our predecessor, Investment Counsel, Inc. from 1929 to 2021.

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