You’ve probably got a lot of questions about 2022. Will a fourth or fifth wave (we’ve lost count!) of COVID-19 hit this winter? Will the price of bacon (say it ain’t so) and other foods we love continue to rise? Will home prices stabilize?
Truthfully, we don’t know for sure. No one does.
This investment outlook is different from others you might read. Sure, we’ll look at some economic indicators and what they might tell us about what could happen in 2022. But we’ll go ahead and tell you up front that we don’t put much stock in indicators.
Why? Because at the end of the day, we know that you control your financial future. No matter what happens this year, it’s just going to be a blip on the radar for a long-term investor like you. Still, it doesn’t hurt to know what the “experts” have to say about the coming year. Just keep in mind that any or all of it could change at any time—and it probably will.
Ready to dive in? Let’s do this!
How Much Can You Save for Retirement in 2022?
According to The National Study of Millionaires, the path to becoming a millionaire runs through your 401(k)! That’s where 8 in 10 millionaires built their wealth. And thanks to adjustments for inflation, you’ll be able to save a little more in your workplace retirement accounts this year.
- The IRS is raising the annual contribution limits for employer-sponsored retirement plans to $20,500 (up from $19,500 in 2021). This includes folks who contribute to a 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan.
- For those who are nearing retirement and need to catch up, you can also put an extra $6,500 into your plan if you’re age 50 and older!1
What about the annual limit for IRAs? That stays the same at $6,000—and that goes for Roth and traditional IRAs. If you’re age 50 or older, the catch-up contribution limit will also remain at $1,000, so you can put up to $7,000 into an IRA in 2022 if you’ve fallen behind on your retirement savings.2
Market chaos, inflation, your future—work with a pro to navigate this stuff.
One last thing before we move on: You’ll be able to save just a little bit more in your Health Savings Account (HSA) if you have one. For 2022, individuals can save up to $3,650 (that’s a $50 increase), while families can put $7,300 (a $100 bump from last year) into their HSAs.3 It’s a really small change, but it’s something!
What Are Economic Indicators?
Economic indicators are just some statistics and trends that give us insight into how the economy is doing and where it might be headed. That’s the short and sweet of it. Think of these economic indicators as thermometers that help us keep an eye on the temperature of the overall economy.
Here are six of the major economic indicators to keep an eye on in 2022:
- Stock Market
- Housing Market
- Interest Rates and Inflation
- Unemployment Rate
- Consumer Confidence
- Gross Domestic Product
Let’s take a look at these indicators and find out what they could mean for you and your money.
1. Stock Market
The stock market is kind of like your local supermarket—the biggest difference is instead of buying bread and milk you’re buying and selling stocks, which are basically small pieces of ownership in a company.
The S&P 500 Index, which measures the performance of the 500 largest, most stable companies in the New York Stock Exchange, is considered the most accurate measure of the stock market as a whole. When this index increases, the economy is usually doing well. Still with us?
You know we're always telling people that the stock market is like a roller coaster—full of ups and downs that can make your head spin. Well, the stock market in 2021 has been on a steady climb. Let’s take a quick look back at what happened—and what we can expect moving forward.
The stock market charged ahead to new heights during 2021 following the crash of March 2020 due to COVID-19 shutdowns. As the COVID-19 vaccine rolled out and more people got back to work, even spikes in COVID-19 cases due to new variants didn’t slow the growth of the S&P 500. After all the dust cleared, the S&P 500 was up almost 27% in 2021—marking the third straight year of positive growth for the stock market.4
For 2022, analysts from Goldman Sachs and Wells Fargo are predicting slower growth, while Morgan Stanley is predicting a drop by the end of year.5,6 So even the experts don’t agree on what’s in store for 2022.
All of this confirms what we’ve always said about investing: No matter what the stock market is doing, stay focused on the long term, avoid making decisions out of fear, and keep saving for retirement (as long as you’re out of debt and have an emergency fund in place).
Political parties and presidents may rise and fall, but the stock market has a long history of moving upward. The historical average annual rate of return for the stock market according to the S&P 500 is 10–12%.7 Stay focused and keep putting money in your 401(k) and your Roth IRA, and do not cash them out “just in case.”
2. Housing Market
So, now that we’ve taken a look at what’s happening with the stock market, what’s in store for the housing market? It’s been pretty crazy in 2021, with fierce competition among home buyers.
Here are a few trends you should be aware of as we move into a new year:
Housing inventory will (mostly) stay low in 2022.
If you’re planning to buy a home in 2022, you’re still going to have to be quick on the draw. Housing inventory (aka the total number of unsold houses) was down just over 16% in November 2021 compared to the previous year—which means homes are still hard to come by in most of the country.8
But there is some hope on the horizon for home buyers! The National Association of Realtors (NAR) says home inventory might increase in 2022 as homebuilders build more homes (despite supply chain problems) and mortgage payment forbearance programs end.9
Home prices are still going up, thanks to high demand.
That’s music to the ears of home sellers! Toward the end of 2021, the median home price was about $363,000—a 16% increase from a year earlier.10 The NAR expects home prices to rise at a slower pace in 2022.11
Interest rates could rise in 2022.
The good news for potential home buyers: Rates are still near record lows. The rate for a 30-year fixed-rate mortgage is hovering near 3%, while the rate for a 15-year fixed-rate mortgage is about 2.25%.12 The bad news: Some economists believe the Federal Reserve will increase interest rates in 2022 to try to slow inflation (we’ll talk about that more in just a minute).13
So if you’re selling a home in 2022, high demand coupled with low interest rates could land you a really good deal.
What if you’re planning to buy a home? Our advice is simple: Be patient. If you have to take out a mortgage, a 15-year mortgage is the only way to go. That’s because it will save you tens of thousands of dollars in interest over the course of repaying your loan.
Whether you’re buying or selling a home, get in touch with one of our real estate professionals. They know your housing market like the back of their hand and can help you buy or sell your home even in a crazy housing market!
3. Interest Rates and Inflation
Okay, hang with us here. The Federal Reserve (aka the Fed) is the U.S. central bank in charge of the nation’s policies on money. The Fed has two main goals: grow the economy at a sustainable rate and keep inflation (rising prices of everything from gas to milk) under control.
The Fed has several ways to achieve its goals, but one of its main tools is raising and lowering interest rates. Lowering interest rates can give the economy a boost because it makes people and businesses more likely to borrow and spend money. But if too many dollars are chasing too few goods, prices rise, and that’s called inflation.
Raising interest rates can slow inflation down because it encourages people to spend less and save more. But if rates are too high, they can choke economic growth. When interest rates are high, businesses tend to spend less, and this could also lead to higher unemployment. So the Fed tries to find a balance that’s just right.
With the economy going through the wringer in 2020 due to COVID-19 shutdowns, the Fed has kept interest rates anchored near 0%. But it appears likely the Fed will raise rates in 2022 to try to slow inflation, which rose by a whopping 6.8% in 2021.14 Higher interest rates usually affect the profits and growth of companies, so this could lead to lower stock prices.
According to a study done by Ramsey Solutions, 21% of Americans say inflation has had a significant impact on their finances.15 So here are some smart ways to deal with it:
- First, stay calm! Don’t panic-buy a bunch of food, gas and other stuff (toilet paper).
- Second, you need to adjust your budget for higher prices. This means you might have to cut back on some things in order to pay for necessities. Look for ways to save money by using coupons, buying generic brands or carpooling.
- Third, keep investing for retirement. The best way to protect your nest egg from rising prices is to grow your money at a higher rate than inflation with good growth stock mutual funds.
No matter how high or how low interest rates are, borrowing money for things like a car loan or a home equity loan is always a bad idea. We want interest to work for you, not against you. Debt isn’t your friend. It takes your time and money, and it gives you headache and heartache in return.
4. Unemployment Rate
This next one is easy. Each month, the unemployment rate tells us how many people got (or lost) a job. It’s one of the clearest ways to see which way the economy is moving. Rising unemployment is scary—that means fewer people are working, which weakens the economy. Lower unemployment means more people are finding work and the economy is getting stronger . . . which is what we all want.
The pandemic turned the jobs market upside down and millions of workers saw their jobs disappear overnight (at least for a little while). At its highest point, the national unemployment rate hit 14.7% in April 2020.16 That means at one point, there were 23.1 million people out of work.17
The jobs market has slowly recovered from the pandemic, and the unemployment rate for December 2021 was 3.9% (representing 6.3 million people).18 Before the pandemic, the unemployment rate was 3.5% (representing 5.7 million people).19
Though lots of companies have open positions, some people have been slow to return to work due to the fear of COVID-19. Others have seen a shift in their priorities and have decided not to rejoin the workforce. Some analysts expect unemployment numbers to stay below 4% by mid-2022 and to return to pre-pandemic levels by the end of 2022.20,21
So, what does all that mean for your investments? Well, as hiring picks up, that means more growth for companies. If you didn’t panic and stayed invested in mutual funds with stocks from those companies, you can expect your portfolio to get a boost from lower unemployment.
5. Consumer Confidence
You can usually tell when someone feels confident. They walk with their head held high, they puff out their chest, and they have a swagger in their step. They also tend to spend more and save less! Well, that last part is what the Consumer Confidence Index says, at least.
The Consumer Confidence Index is a survey done by an organization called The Conference Board. The index measures how everyday Americans feel about the economy. When people are confident, they typically spend more money. When their confidence is low, they don’t.
The Consumer Confidence Index increased in December 2021, a sign that consumer spending will continue to spur economic growth.22 A Ramsey Solutions survey confirms that trend. It found that 80% of Americans planned to spend the same or more on Christmas in 2021 as they did in 2020.23
6. Gross Domestic Product
Gross domestic product (GDP) is the value of all goods and services produced within a country during a specific time period. The GDP of the United States is a huge number: about $20 trillion a year!24
GDP growth is a key measure of the health of a country’s economy.
Analysts expect GDP to dip to around 3.5% growth in 2022, but this is still higher than the normal growth rate of 2–3%.27
A healthy economy that is growing is another bit of good news for the potential growth of your investments in 2022!
Here’s the Bottom Line
The key to building wealth is consistency. That’s the thread that ties millionaires together.
No matter what’s going on in the world, millionaires keep working hard and putting money away. They don’t get distracted. They don’t put their hard-earned money in a flashy investing trend they don’t fully understand. They don’t panic every time the stock market has a bad day.
And one day, they look up and see their nest egg has hit the seven-figure mark. Now that’s what winning looks like. And there’s no reason that can’t be you someday.
Dave's new book, Baby Steps Millionaires, will show you the proven path that millions of Americans have taken to become millionaires—and how you can become one too! Order your copy today to learn how to bust through the barriers preventing you from becoming a millionaire.
Need More Investment Advice? Find a Pro!
While the current trends give you a lot to be confident about for your investments and the economy this year, we’re guessing you probably have more questions about your particular situation. While we can’t speak into the specifics of your financial plan, the good news is you can sit down with an investment professional in your area who can.
These are general guidelines. Your situation may be unique. If you have questions, connect with a SmartVestor Pro.