Financial Trends to Look For in 2023

There's little doubt that the biggest financial trend in 2022 was inflation. Year-over-year monthly inflation rates got as high as 9.1% after years of hovering in the 2% range. When combined with ongoing market volatility, it created financial challenges for many Americans.

In some ways, the financial trends of 2022 created challenges that were felt more broadly than the pandemic and supply chain issues in 2020 and 2021. That's because workers who kept their jobs during the pandemic could save more money, thanks to reduced travel and other expenses. While supply chain backups increased the price of hard-to-find items, such as new cars, they had less impact on people who didn't need to make large purchases. Supply chain issues impacted everything from the cost of groceries and apartment rentals to the ability to pay off debt or save and invest for retirement or other goals.

Three First Citizens experts—Phillip Neuhart, Director of Market and Economic Research; Nerre Shuriah, Senior Director of Wealth Planning; and Chuck Ford, Director of Mortgage Sales and Production—discuss some of the biggest financial trends of 2022, what to expect in 2023, and what people may want to consider to put themselves in the best financial position possible.

1 Inflation impacts everyone's wallets

What happened in 2022

Did you notice that you were paying more at the grocery store and almost everywhere else? According to the Consumer Price Index, the average cost of items was 7.7% higher in October compared to the same month in 2021. Those figures were primarily driven by significant price increases in items like food, which rose 10.9% from the year before, and energy costs, which were 17.6% higher than in 2021. Many different factors, from the war in Ukraine to supply chain disruptions, have affected inflation.

"Inflation put a pinch on people's extra income," says Shuriah. "The ability to engage in a lot of extracurricular activities, like travel, was impacted significantly." Inflation is important because it can impact your budget, and because the ways the federal government seeks to control inflation also can impact your financial life.

What might happen in 2023

Shuriah and Neuhart say they're encouraged by signs inflation could continue to moderate in 2023. Year over year, inflation rates appeared to spike in the summer and decrease in the fall. They caution, however, that while the rate of increasing prices should slow down, you shouldn't expect to see prices revert to 2021 levels.

"There's reason to think that inflation moderates in 2023, but at a pace slower than anyone is going to be happy with," Neuhart says. "For example, in the first quarter, we could see inflation at 6%. That's lower than where we are today, but still too high."

He adds that because supply chain challenges have improved, retailers now have more inventory. That often results in discounted prices, though the impact will likely be limited to cars and electronics instead of everyday essentials such as groceries and gasoline.

Inflation impacts prices unevenly

Inflation creates price headaches, but not equally for all goods. According to the US Bureau of Labor Statistics, the unadjusted change in prices from November 2021 to November 2022 showed varied increases across a number of commodities:

• Apparel rose 3.6%
• Medical core services rose 4.4%
• Shelter rose 7.1%
• New vehicles rose 7.2%
• Gasoline rose 10.1%
• Food rose 10.6%
• Electricity rose 13.7%

What it may mean for you

• Tracking your expenses is always important but even more so during times of inflation. Adjust your budget to understand how price increases are impacting your spending on essential items and consider what changes to discretionary spending or saving you may need to make as a result.
• For those nearing retirement, decide whether it makes more sense to delay retirement or find a way to reduce your spending in the near term to avoid taking distributions from your savings at a time when your money's buying you less.
• Keep an eye on opportunities from the Inflation Reduction Act which was passed in the summer. It includes incentives for certain types of energy-efficient home improvements and purchases.

2 Interest rates rise and the housing market steadies

What happened in 2022

The interest rate you're charged on loans, credit cards and more is greatly impacted by the Federal Funds Rate, which is set by the Federal Reserve. As inflation became more of an issue in 2022, the Fed responded by raising interest rates in an effort to slow down the economy, with the goal of lowering inflation. After starting the year at 0.25%, the Fed raised rates on six separate occasions through November, bringing the rate up to 4.0%. As a result, this increased the interest rates offered for mortgages and loans, credit cards, and other types of debt.

After dramatic price increases in homes throughout 2021 and into the early part of 2022, home values appear to have steadied in some parts of the country, and values have even decreased in some areas. Higher interest rates, combined with increased values, mean that many potential buyers are holding off unless they really need to make a move.

"We've seen the values of homes increase in the 20% to 25% range in some areas," notes Ford. "We're probably now seeing some areas of the country where there's more softening of the market than in the Southeast, but if you bought at the top of the market, you're probably still at the top of the market."

There's a flip side—a rise in interest rates often means that different types of savings accounts, such as money market accounts, will offer higher interest rates, too. That may help your savings grow faster.

What might happen in 2023

It's difficult to predict how the Fed will act. If inflation still feels high, the Fed could continue to increase interest rates. However, if the economy slows and there are fears of a recession, the Fed could hold off on increases or even reduce the rate as a way to encourage more consumer activity.

In the housing market, supply challenges have caused some homebuilders to slow or stop projects, so there are fewer new construction homes available, which could help existing homes retain their values. Ford says he doesn't expect a rash of foreclosures like we saw in 2008 and 2009 after a long run-up in housing values came to a crashing halt. And, for people who held off on buying a home or making a move because properties were flipping so quickly at increasing values, some may see price steadiness as a good reason to now make that move, even if the cost of getting a mortgage is a little higher.

What it may mean for you

• If you're considering purchasing a home, check to see whether you can get a better rate on an adjustable rate mortgage, or ARM, as opposed to a fixed-rate mortgage. Then, if interest rates go down before your ARM is complete, you can lock in a lower fixed rate.
• If you have money in savings that you'd like to use within the next few years for the purchase of something like a car or home, consider which interest-bearing accounts may offer the best rates to help you while the stock market is volatile.
• Keep an eye on credit card debt and any other debt with a variable rate. As that rate rises, you'll be paying more in interest payments and less on your actual balance. You may consider shifting some of your budget to pay down higher-interest debt or consolidating debt by taking out a personal loan or transferring debt to a card with an introductory 0% interest rate.

3 Market volatility affects returns

What happened in 2022

At the start of 2022, the S&P 500 Index was as high as it's ever been. Since then, dips have been followed by spikes, then followed by more losses and then gains. Neuhart notes that the difference between the high point and the low point of the S&P 500 in 2022 is about 25%, even though the index was only down about 15% at the start of December.

Fixed-income investments have had their own share of challenges. As interest rates have risen, so have yields on bonds, even though values may have fallen.

What might happen in 2023

It's fair to say 2023 could be more of the same for the stock market. "We still have an active Federal Reserve, we still have elevated inflation and we still have an economy that's likely slowing," Neuhart points out. "So, volatility will continue." You can find a more in-depth analysis from Neuhart and First Citizens Chief Investment Officer Brent Ciliano in the First Citizens 2023 Market Outlook.

What it may mean for you

• It's easy to let emotion take over when you see the value of your investments fluctuating, but trying to time the market is difficult, especially with so much volatility. Staying invested gives you the best chance of recapturing value when prices do rise.
• If you're nearing retirement, you should look at how market volatility has impacted your investments and what that means for your retirement savings. While many investors get more conservative as they get closer to retirement to protect what they have, if your investments have lost money, you may need to adjust your strategy to stay more aggressive, especially as people are living more years in retirement.

4 A strong job market helps the economy avoid recession—for now

What happened in 2022

There were a lot of positives in the US economy in 2022. As of the November jobs report from the Labor Department, unemployment was just 3.7%, while wages were up 5.1% from a year earlier. More than 250,000 jobs were created every month of the year.

"What we're seeing right now is wages are growing, but at a slower rate than inflation," Neuhart says. "What makes the current period interesting is that economic growth has slowed as the Fed has tightened monetary policy to combat inflation. But the labor market is tight, and consumer spending is still okay."

What might happen in 2023

First Citizens is currently forecasting a 60% chance of a recession in 2023. "Recessions are characterized by weaker economic growth, along with a weakening labor market," Neuhart notes. "Eventually, if you do see deterioration in the jobs market, no matter what's happening with inflation, that does impact consumer spending."

Job losses could lead to a loosening of the currently tight labor market, which could result in less wage growth due to a less competitive job market. Neuhart adds that with the labor market currently strong, the potential for a recession is still a bit of an unknown.

What it may mean for you

• Be sure you have an emergency fund set aside in case of job loss. Experts suggest having 3 to 6 months of salary saved.
• If you need to cut expenses, take a thorough look at recurring expenses and see if there's anything that can be trimmed or outright eliminated. Subscription services are one of the top hidden costs that people don't realize they're spending money on.

"I would just really encourage people to have a financial plan," Shuriah says, as it lays the groundwork for a solid financial course during challenging times. "That will give them a path that would help them, whether we have a downturn or high inflation," she says. "It'll tell them if they're on the right track."