Year-End Economic Update

December 12, 2023

As we approach the end of 2023 (still feels crazy to say that!), I wanted to take a moment to review a few of the numbers that I have been most frequently asked about in the last year. The last few years have been nothing if not interesting to say the least and as such I have observed a lot of uncertainty. That said, lets talk about a few numbers that have been on most every one’s mind: market performance, mortgage rates, and inflation.

We have written at length about the historic year the markets had in 2022. A couple of weeks ago, I wrote a post explaining the math behind what it takes to regain market losses (you can read that post here). That said, 2023 has given us a perfect example of how difficult it is for the market to recover. For context, here is a chart showing year to date returns of the S&P 500 for 2023 (12/8/2023 to be exact):

 

As you can see, the index has rebounded quite well since its disastrous 2022 performance. You would be forgiven for thinking that the S&P 500 would be back to where it was a year ago. However, as we talked about a couple of weeks ago, that is not the case. Here is a chart showing the total return of the S&P 500 from 12/31/2021 – 12/8/2023:

Despite better than average returns for the 2023, the index’s performance over the last couple of years is still in the red! That said, if you feel like your investments are taking a long time to recover, take some comfort in the fact that the rest of the market is in the same boat! Again, as I have said many times before, investing is a long game. Those who do well are those who understand that time in the market is more important than timing the market. Which is to say, patience is the key to overcoming market losses not making frantic changes and trades.

Over the last couple of years, the Fed has progressively raised interest rates in an effort to control inflation. This of course has had an effect on mortgage rates for home buyers as well as the total price to purchase a home. This chart illustrates those effects well:

At the end of 2021 rates on both 30yr and 15yr mortgages were under 3.5% on average and the median price to buy a home was around $360,000. Fast forward to December of 2023 and the interest rates on 30yr and 15yr mortgages are 7.03% and 6.29% respectively while the median price to purchase a home has risen to almost $400,000. Suffice it to say that the cost of buying a home is substantially higher now than it was only a couple of years ago. If you are considering whether or not now is the right time for you to buy a house, here is a blog post I wrote a few months ago addressing that very topic.

If you are anything like my wife and I then you have likely felt like everything feels more expensive than it did a couple of years ago. Well, it turns out that this is not simply a feeling but a reality! After all, the Fed felt it necessary to take action in order to curb rising prices caused by inflation. Here is a chart showing the deteriorating value of the US dollar over the last couple of years:

The Consumer Price Index (CPI) is a general measure of the average change (or in this case increase) of prices paid by consumers. Simply put, prices have increased by an above average amount over the last couple of years resulting in your dollar not stretching as far as it used to. The hope is that by raising interest rates the Fed would be able to curb inflation and bring it back to its target average of 2% a year on average. If the above charts are any indication, then it does appear that inflation is beginning to slow down although we have a ways to go to get back to the target average.
As you read this blog post, please try not to come away front it feeling discouraged or disheartened. The economy goes through cycles and will continue to! It can be dismaying to see your investment account plummet and your grocery bill rise but remember that this is only a small moment in time. Our economy has been here (and much, much worse!) before and recovered. The positive performance in the market this year is one indicator that we are back on the right track! As we reach the end of 2023, take time away from the news, the numbers, and checking your account balances. Instead, spend your time with the ones you love.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.