MoneySense – 2022’s year in Review: The financial highs, lows and what’s in store for 2023

What happened in 2022 to affect our finances

Let’s break down the highs and lows of 2022.

1. War

In late February, when Russia invaded Ukraine, inflation—which had been almost non-existent for decades—was already on the rise, thanks to COVID. Disrupted supply chains and nearly full employment were pushing up food prices and wages. Russia’s invasion of Ukraine led to a spike in oil prices, taking inflation to levels higher than it likely would have hit, if there were no war.

2. The central banks take charge

In March, the centrals had to do something to help consumers who were finding it harder and harder to buy groceries. So, they raised interest rates—their most powerful tool to fight inflation. I don’t think anyone, including the Bank of Canada (BoC) and the U.S. Federal Reserve, could have envisioned raising rates, six and seven times respectively, throughout the year, or that they would hike them by as much as they did. Here and in the U.S., interest rates have increased to more than 4%, pushing borrowing costs to new highs.

The central banks were active in ways we haven’t seen since the 1980s, the last time inflation surged in both countries. In Canada, inflation peaked at 12.9% in 1981. At the time of writing this column, it is 6.9% (7.7% in the U.S.).

The key takeaway from the recent rate hikes in 2022 is that fighting inflation is the central banks’ priority—even if their actions potentially lead to unemployment and people not being able to afford their mortgages.

I believe the Federal and the BoC felt the U.S. and Canadian economies were strong enough to weather interest rate increases. And, so far, they are correct.

3. The economy keeps growing

For most of 2022, the U.S. and Canadian economies experienced modest gross domestic product (GDP) growth. In the U.S., annual GDP grew 2.9%. In Canada, GDP grew 4.6% in 2022.

Of course, some sectors were impacted more than others by the interest rate hikes. Real estate and technology are both feeling the brunt of the increases even now. As well, the average Canadian carrying debt—and particularly anyone with a variable rate mortgage—have seen the cost of their debt surge.

4. The markets’ response: down and up

As it became clear the central banks were committed to slowing the economy with rate hikes, the markets started their descent. We hit the bottom towards the end of June. It was the worst six months of the year since 1970.

July marked the start of an upward swing despite dips in the latter half of August and September.

October and November have proven to be some of the best months ever for the markets, returning portfolios to a positive for the second half of the year. In December, the markets started flat to slightly negative.

Hopefully, the markets will rally to finish off the year to conclude on a positive note, as investors started to regain what they lost during the disastrous first half of the year.

5. COVID continues to affect the markets

Even though Canada is no longer operating under a pandemic, the effects are still playing out in the labour market. Many Canadians did not return to their jobs after the initial lockdowns, and many want to keep working from home. It’s going to take a long time to fill the worker shortage that businesses are still trying to address.

6. Tech takes it on the chin—buy now

Whenever interest rates rise, it’s trouble for the tech industry. When economic growth stalls, tech stalls. That’s why we saw massive job cuts in the sector in 2022. Crunchbase News reports more than 88,000 layoffs in the U.S. tech space alone. That said, If any sector is going to provide the growth needed to cover inflation rates of 7%, 8%, 9%, it’s tech. A utility paying a 4% dividend is not going to allow you to keep up with the cost of living.

For Canadian investors, tech may be the place to go right now. Stock prices are lower, and this is where the bounce-back will likely rebound from. Microsoft, Amazon and Alphabet are all down double digits. Go to where the values are today and you will be rewarded when the economy gains momentum.

7. The 2022 Crypto crash(es)

Digital currencies lost USD$2 trillion in 2022. While the blockchain technology behind the currency is here to stay—and I think there will be some digital currencies that survive the madness—my advice to anyone who wants to invest is to be cautious. Take a very small position in your portfolio. It’s still not fully regulated—nor is it backed by a government, bank, or anything really, which means investors are in the wild west.

What can Canadians expect for the economy and for investments in 2023?

It’s tough to say what will happen, as it’s all up to the central banks. Are they going to continue to raise rates above 5%? Are they going to pause?

At this point, I think if there is to be a market rally, it will come in the second half of the year. The first half will be choppy. The struggle for nervous investors will be deciding to stay invested when companies lower their growth estimates. My recommendation: continue to stay invested in good quality stocks and look for dividend payers that will pay you in the short term while you wait for growth in the long term.

Heading into 2023, investors need to separate the noise from reality and keep a level head. Most investors are going to be invested 18 months from now and beyond. This is an opportunity to improve and invest in your portfolio. Talk to your advisor, as they understand the markets and can guide you. The returns will come.

Allan Small is the Senior Investment Advisor at the Allan Small Financial Group with iA Private Wealth (allansmall.com) and host of The Allan Small Financial Show. He is also the author of How To Profit When Investors Are Scared. He can be reached at allan@allansmall.com.