Financial wellness month is the perfect time to take a look at your savings plans and learn new ways to be financially independent. Even if you are satisfied with your current level of financial knowledge, there is always more to learn! Take some time this month to look into a certain aspect of financial wellness you are curious about or think you could improve upon. Here are some of our top tips to help you on your path to financial freedom!
Improve Your Knowledge
If you have been curious about certain aspects of financial wellness, there are hundreds of great books out there that can answer all your questions. Freakonomics takes a sociological approach to financial thinking and examines the ways in which you can apply economic rationale to your everyday life. Though this book does not provide specific tips for saving and spending, it may change the way you think about wealth and the economy overall. Think and Grow Rich is perhaps the single most popular piece of motivational literature there is. This book examines the most successful people of all time in an attempt to answer the question “what makes a winner?”. Though the title “Think and Grow Rich” may imply that it is all about money, the book instead focuses on the self-confidence required to be successful, and how it can be learned and taught.
In addition to reading books, there are also a myriad of online resources that can assist you in your research. The Blakely Financial blogs and newsletters contain tips on personal finance and investments to help you increase your financial savvy. Simply reading an article or two a day can increase your financial knowledge throughout the course of the month!
Small Changes Add Up
Small changes can make a big impact on your finances! If attaining your goals feels like an impossible task, start small. Over time, your smart habits will become routine, and your ambitions will no longer feel out of reach. This can be done by limiting your takeout meals, canceling unused subscriptions, or even just buying generic brand items at the grocery store. These types of changes may feel overly frugal, but they can quickly add up to significant savings you can use on more important purchases and adventures later.
Emergency Fund
One of the most important, but easily forgotten, aspects of a sound financial plan is an emergency fund. This money should be easily accessible, and significant enough to protect you from unexpected crises. Medical emergencies, car problems, and home repairs can severely affect your budget. Having cash set aside for such events will not only prepare you for the worst but decrease your stress level as you will be confident in your ability to handle anything life throws your way.
Work with a Financial Advisor
Perhaps the best thing you can do for yourself this financial wellness month is to seek the advice of a professional. A trained financial advisor can build you a custom plan to guide you to your long-term financial goals. Please feel free to contact our team at Blakely Financial today to help get you started.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals. Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Commonwealth Financial Network® or Blakely Financial does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.
As 2022 comes to a close, real risks persist. China is still struggling with the economic impact of Covid-19. Crypto companies here in the U.S. have imploded. The Ukraine war is ongoing, disrupting global food and energy markets. Last, but certainly not least, inflation remains at a 40-year high, which has left both stocks and bonds in a bear market. Given all this disruption, there are many questions and worries about what’s in store for the economy and markets in 2023.
As citizens, as workers, and as family members, we question whether we’re headed for a recession. If so, what would that mean for us and our loved ones? As investors watching the markets after a difficult 2022, we want to know whether we will see a rebound—or more declines. And with everything that is happening, we’re concerned that things might get even worse, a repeat of sorts of The Great Financial Crisis. In other words, worry levels are high, coloring everyone’s outlook on the year ahead.
Still, there’s reason to believe that things are not nearly as bad as many headlines suggest. Yes, we do face risks. But the economic and market fundamentals are much stronger now than they were at the start of 2022. That strength should limit the risks and provide more opportunities in 2023.
The Economy: Recession Worries Abound
Many of the recession headlines we’re seeing revolve around inflation and the Fed, which continues to raise interest rates as we end 2022. Given those two factors, we can expect substantial economic slowing. Indeed, this slowdown is already apparent, especially in housing (see Figure 1).
The economic effects of interest rate hikes can take a year or more to show up in the economy. If those effects are severe enough, a recession is very possible sometime next year. Here, it’s important to keep in mind that not all recessions are severe. If we do get a recession in 2023, it is likely to be both mild and short-lived. The reason? Consumers and the job market.
The consumer and jobs. When discussing the outlook of the economy, the consumer plays a central role. After all, consumer spending accounts for more than two-thirds of the economy. But consumers can’t spend if they don’t have an income and confidence, so the job market is an equally important factor. Given that, generally speaking, a severe recession isn’t possible without a pullback in both jobs and confidence. The good news is that both remain strong.
Job growth over the past 12 months was more than twice the level typical of past expansions. Plus, there are more than 10 million open jobs. While the labor market does seem to be slowing, it has quite a way to go before it hits recessionary levels (see Figure 2). With that cushion, we are not likely to see a recession until the second half of next year, if then.
Confidence has also pulled back, but it remains high based on historical levels. People are making money and spending money—this will provide economic support, even in the face of higher rates.
Business confidence and investment. Driven by both consumer spending and the strong labor market, business confidence and investment also remain healthy. While we see slowing (and, as mentioned, may see a recession), the economic fundamentals remain surprisingly strong.
Inflation and interest rates. If the economy continues to grow, those strong fundamentals could well keep inflation high and keep the Fed hiking, leading to a worse recession. This outcome is a possibility—but it’s not what the data is telling us.
Inflation appears to have peaked, with most of its components turning down, and that trend is likely to continue. The Fed will likely keep hiking interest rates. But both the pace of those hikes and their ultimate peak will begin to subside as inflation starts to ease.
As 2022 ends, we see that scenario not only in the inflation data but also in the bond market, with the yield on the U.S. Treasury 10-year note peaking and then rolling over. That peak in rates likely reflects an impending slowdown but also indicates that the interest rate damage may be topping out as well. All of that provides a good foundation for markets.
The Markets: Risks and Opportunities
Much of the damage to financial markets in 2022 came from higher interest rates. If rates peak, the damage will subside. And if rates start to decline? Markets could see a rebound.
Bonds. The declines in bond values in 2022 were linked directly to higher rates. As rates moderate, those declines are unlikely to repeat. Beyond that—and for the first time in years—bondholders are now being paid competitive rates of interest. So, while the bond market took a big hit in 2022, the year ahead is likely to be substantially better.
Stocks. The picture for stocks is more complex—but still relatively positive. Stocks also got hit by rising interest rates, as valuations (which depend on rates) dropped. That said, we entered 2022 with valuations at very high levels. We’ll be entering 2023 with valuations at a much more reasonable place: not cheap, but in line with historical averages. From a valuation standpoint, the risk to stocks will be much lower next year.
With valuations reasonable, the results for stocks will depend largely on how corporate earnings play out. Again, the headlines are discouraging, as analysts have downgraded expectations. Beyond the lower sales a recession would generate, there are concerns about corporate margins, with higher wages and debt service costs likely to hit the bottom line. Even if valuations hold, lower earnings are a headwind for stocks.
Here, there is some good news, as wage growth and interest rates appear to be peaking. As such, the damage may be less than expected. Typically, analyst expectations are too pessimistic, so this outcome would be in line with historical results. And as noted above, any recession will likely be mild. There is certainly some downside risk, but relative to expectations, there is more upside opportunity.
Will 2023 Be Better Than It Looks?
As you can see, there is much to worry about when assessing the 2023 outlook for the economy and the markets. Fortunately, those worries are largely incorporated into expectations and prices. So, if things are better than expected (which seems probable on multiple fronts), then the results should be positive as well.
After a difficult 2022, when both the economy and markets adjusted to high inflation and interest rates, supply shortages, and other shocks, the natural expectation is that things will remain bad. What we are seeing in the data, however, is that despite those shocks and the real risks, the economy is doing better than expected, and inflation is in the process of being contained. We are making progress, and that progress should continue into 2023.
Will 2023 be a great year for the economy and markets? Not likely. Will it be better than 2022? Very likely—and quite possibly substantially better. As a motto, “better than it looks” isn’t what any of us would aspire to. But as we enter the new year, it could be a lot worse.
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Investments are subject to risk, including the loss of principal. Past performance is no guarantee of future results. This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product.
Authored byBrad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network®.
Commonwealth Financial Network® or Blakely Financial does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.
Much of this year’s market volatility is attributed to uncertain federal reserve policies, especially with respect to the terminal rate, which represents the forecasted level at which hikes will stop. The terminal rate changes consistently in response to new information.
Interest Rates
The Federal Reserve is committed to lowering inflation before it can pause rate hikes. They have been raising interest rates by .75 percentage points and did so for the 6th consecutive time in November. Federal Reserve Chairman Jerome Powell recently stated that these increases will continue, but at a lower frequency: “Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” he added. “The time for moderating the pace of rate increases may come as soon as the December meeting.”
Housing
After a chaotic couple of years for the housing market, 2022 brought a decline in existing home sales, which has begun to bring average home sale prices down with it. This is connected to the high-interest rates discussed earlier, as we see mortgage rates north of 7%. Though there is no way to be completely certain, it seems as if these rates will continue to inch up over the coming months until inflation has returned to more comfortable rates. Though this is not good news for first-time homebuyers, hopefully, it will indicate a gradual return to normalcy and give the housing market a chance to balance out.
Economy
Even though the housing sector has slowed down, overall economic growth seems generally on track as spending activity has remained resilient. The third-quarter GDP estimates showed growth at a rate of 2.6%, slightly better than predicted earlier. Consumer spending indicates a stabilization in demand and goes along with healthy rates of employment.
Continuing Risks
Hopefully, the improvements we have observed in fundamental sectors indicate long-term growth. In the meantime, several risks remain abroad, such as the slowdown in China, the crisis in Ukraine, and the tightening of global monetary policy. How these may impact U.S. markets and our economy remains to be seen, but we should be prepared regardless for continued volatility as we begin 2023.
Looking Towards the Future
Throughout history, stocks fall as inflation reaches a peak, and rebound strongly once inflation starts to come down. Volatility is the price of admission for long-term investment games, which rewards the patient investor.
Here at Blakely Financial, we constantly monitor the economy, the markets, and your portfolios to assess how our chosen investments are performing and decide if changes are necessary or prudent. Overall, we have observed multiple Indications of reduced inflationary pressure in the months ahead, which could be good for stocks. We remain confident in our medium and long-term strategies, regardless of what the immediate future may bring.
Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.
Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.
Fraud has become an increasingly common issue facing individuals of all ages, especially when it comes to their finances. In an attempt to curb fraud, we have compiled some common scams, as well as tactics to avoid them. Seniors and those without strong technology skills are more likely to fall victim to scams that come in the form of emails, texts, or phone calls. Knowing how to recognize fraud can prevent you from having your identity, money, or banking information stolen.
Phishing
If you receive a text or email message asking you to click on a suspicious link, don’t do it! If you are unsure of the source of the message, directly contact the company the sender is claiming to represent. These texts and emails often make dramatic claims to grab your attention. For instance, many phishing emails will tell you that your payment information is incorrect, or that there has been a suspicious attempt to log into your account. To prevent these types of messages, make sure your phone and computer are updated with security software, and opt-in to multi-factor authentication on any important accounts you create.
If you believe a message is fraudulent, you can report it to the Anti-Phishing Working Group. This organization seeks to identify trends in cybercrime and prevent others from falling victim to fraud.
Confirm Your Financial Institutions
If you receive texts, calls, or emails requesting your banking information, contact the institution separately to confirm the validity of the message. Scammers will often pretend to be a representative of a bank or financial institution to get information such as your credit card number, social security number, or account password. These messages are meant to alarm you, and often claim your account has been placed on hold or is under some form of investigation.
Sometimes scammers will ask you to call a phone number so a “representative” can walk you through the process of restoring your account. In this case, it is always best to call the institution using a verified phone number from the company’s website. Even if a message or phone call seems very urgent- take a deep breath and don’t click any links or give out information before confirming it is safe to do so.
Monitor Your Credit Report
Examining your credit report regularly can help you spot fraud. Incorrect personal information, accounts you don’t recognize, or a sudden change in credit score could all be signs that your credit may have been compromised by a scammer. You are entitled to a free credit report each year from each of the nationwide credit reporting companies. Also, many credit card providers monitor your credit as part of your membership. Be sure to keep an eye on your credit to avoid any fraudulent accounts open in your name!
Wire Fraud
Wire fraud typically involves a phone call and is usually directed at seniors. One scam involves a caller pretending to be a grandchild in distress asking for an emergency wire transfer. Another involves a fake IRS agent threatening arrest if you don’t wire funds immediately. Any time you send money through a wire transfer, be sure to confirm the identity of the recipient and don’t be rushed by a sense of false urgency. To research the phone number calling you, enter the number into Google and see if others have reported it as fraud. It can also help to add your number to the National Do Not Call Registry, or to silence unknown callers, anyone with an important message will typically leave a voicemail.
Protect yourself from scams by keeping a close eye on your finances- working with a trusted financial advisor can provide you with a complete understanding of your accounts so you will not be as likely to fall victim to fraud.
Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.
Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.
If you receive Social Security benefits, you can expect them to be boosted by 8.7% in 2023. This cost-of-living adjustment (COLA) was announced by the Social Security Administration on October 13th, and it is a massive increase from that of previous years.
What does this mean for you, and what does it imply for the future?
In 2022, the Social Security cost-of-living adjustment was 5.9%, which was the highest in forty years. The last time the COLA was this high was in 1981, at 11.2%. This adjustment rate is set automatically, based on the inflation rate each year between July and September as it compares to the previous year, and has been set this way since the 1970’s. The amount is based on the rise in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Use the extra benefit wisely
Despite these annual adjustments for inflation, a 2021 study found that the buying power of Social Security benefits declined by 30% from 2000 to early 2021, in part because the CPI-W is weighted more heavily toward items purchased by younger workers than by Social Security beneficiaries. Due to this method of setting the COLA, you should not anticipate that the increase you are seeing in 2023 will be continued in the upcoming years; be sure to handle the extra money wisely to prepare for future years in which your benefits may not be as high.
While the COLA will actually take effect with the December 2022 benefits, payments will be made in January 2023. To gauge how much more money you may see next year, take your net Social Security benefit, add in your Medicare premium, and multiply that by the 2023 COLA.
If you have not yet begun to claim Social Security benefits, you may consider delaying until they are needed. Your benefits will still reflect the cost-of-living adjustments whether you claim them now or in a later year. Each year that you delay, benefits will increase 8% from your retirement age until age 70. Obviously, this strategy will not be ideal for every person, especially if you have health concerns, but you can change your mind at any point and begin receiving payments- you don’t have to delay until age 70 even if that was your initial plan. Conversely, if you are not ready to retire or decide to go back to work after retiring, you can still receive your social security benefits.
If you are in need of a financial planner to help you get the most out of your benefits to enjoy a long and comfortable retirement, contact Blakely Financial today.
Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.
Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.
On August 24, 2022, President Biden announced plans to offer student loan forgiveness to selected individuals. Below is a summary of the executive action that the Biden Administration plans to effectuate. It’s important to note that strong legal challenges to these provisions are likely because the changes are sought to be implemented without Congressional approval. Many of you or your family members may be affected, so the team at Blakely Financial wanted to update you with the information that we have so far.
Final Extension of Student Loan Repayment Moratorium
Borrowers won’t be required to make payments on their federal student loans through December 31, 2022. Borrowers haven’t been required to make student loan payments for more than two years thanks to pandemic-related relief for borrowers. No interest has accrued on federal student loans during the repayment pause. President Biden has indicated that this will be the final extension, and that borrowers will have to resume student loan repayments in early 2023.
Forgiveness of $10,000–$20,000 from Student Loan Balances
Individuals making less than $125,000 per year ($250,000 for married couples) in income will be eligible to have up to $10,000 of student loan debt canceled. For Pell Grant recipients, the cancellation amount may increase to $20,000. In most circumstances, the Department of Education will have individual income data to be able to automatically process the debt cancellation. In the event the government doesn’t have the relevant data, it anticipates providing applications in short order.
Proposed Changes to Existing Repayment System
The Biden Administration also announced proposed changes to income-based student loan repayment programs, whereby individuals could potentially be required to pay a lower proportion of their income to service their student loan debt. In addition, student loan forgiveness could be accelerated for some borrowers, depending on their student loan balances. The timeline or definitiveness of these changes is unclear; they have been announced as “proposed rules.”
Additional Resources
As with any government policy announcement, details are sparse; more information should be forthcoming in the coming days and weeks. For more information on debt relief actions, visit these resources:
As always, we are here to help. Thank you for your continued trust and confidence.
Sincerely,
The Blakely Financial Team
These hyperlinks are being provided as a courtesy and are for informational purposes only. We make no representation as to the completeness or accuracy of information provided at these websites.
Blakely Financial, Inc. is located at 1022 Hutton Lane Suite 109, High Point, NC 27262 and can be reached at 336-885-2530. Securities and Advisory Services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network®.
When stocks are declining, it can cause a lot of stress and uncertainty for investors. Now in 2022, we are in the midst of a bear market- here is how you can best prepare yourself to make it through, stay positive, and benefit from the bull market that will eventually follow!
Does a Bear Market Lead to a Recession?
Bear markets happen and are to be expected given the current tumultuous nature of the pandemic and the sociopolitical climate. Bear markets don’t necessarily indicate economic recession. In this current climate, many experts, like Mitch Zacks, believe we are not headed for recession:
“The U.S. jobs market is still historically tight, household finances and the U.S. consumer are still healthy, and corporate profit margins are high. I believe sentiment has fueled declines more than fundamentals have.”
Though not all experts agree on what will happen next, the usual indicators of a recession are not currently present in 2022.
Bear Markets in History
The term “bear market” refers to a period of at least two months in which stocks fall at least 20% off their high. Though this percentage is significant, bear markets could perhaps be more generally defined by the sentiments of investors, as they lose confidence and become more risk-averse during these times. Throughout history, stocks lose an average of 36% during a bear market.
It’s important to note, bear markets tend to last less than a year; whereas, The average bull market duration is 2.7 years. The stock market is positive the majority of the time, so it is best to think rationally about navigating a bear market before catastrophic thinking takes over.
Patience Pays Off
Though it can be troublesome to think about the losses that occur during a bear market, it is important to shift your mindset towards the future. Many investors take drastic steps when they realize the market is trending downward, often selling off stocks for fear of more substantial losses. Alternatively, some may feel pressure to “buy the dip” in hopes that the prices will soon rise to a profitable level. Both of these types of reactions can in some cases be successful, but are often not. It is impossible to time the market exactly, and attempting to do so can cause more financial and emotional stress than it’s worth.
“Selling out of stocks and waiting for confirmation that a new bull market has arrived almost certainly means missing the first several months of the new bull, which is a crucial time to be invested.”
This advice may not be applicable for certain people, such as those on the brink of retirement who may not have the time to wait out a volatile market. In any case, it is important to ensure your assets are in the right place for you in particular to meet your long or short term investment goals.
Protect Yourself Against Future Bear Markets
During a bull market, it can be easy to forget how uncomfortable it is to watch your assets go down in value. Be sure to use your resources in times of economic security to ensure your financial safety against future losses. Though the media can be a helpful tool in assessing the state of the market, it will not be the best source of financial advice. Only your financial advisor will know the specifics about your means and goals to help you navigate your way through a volatile market.
Investing will always come with risks, and a declining market is one of them! Contact Blakely Financial for further assistance in maintaining diversified investments through a bear market.
Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.
Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.
There is no agreed-upon age to begin teaching your child about money. Some sources claim they should learn around age 7, while others say they need to be familiarized with the concepts at age 3. There are plenty of ways to teach your young child about money, especially in subtle ways that help them build the skills they will later need for financial literacy.
Does a toddler really need to know about money?
As with many financial matters, our team at Blakely Financial believes the best advice is to start early. The sooner children learn financial fundamentals, the more likely they will become informed investors later in life. You never know; you may even benefit from learning alongside your child! If there are areas where you could use a refresher, take the time to review those topics as you approach them with your son or daughter. Remember to always consult with your financial advisor for guidance on investing and saving.
Obviously, a toddler will not understand the importance of a diverse portfolio. There are ways, however, to provide children with skills that will help them make smart financial decisions as they age. The first few years of life are critical for mental development. Toys that incorporate counting, such as building blocks, can help your child develop mathematical skills. Many young kids booksalso cover important topics like saving, spending, and the value of a dollar.
How can I teach money skills to a young child?
Teaching your child about money doesn’t just mean describing how to create a budget. Forming a positive association with the concept of money is essential to future financial wellness. Be sure you and your partner don’t instill a negative association with money in your child by arguing about finances in front of them. Do not avoid the topic of money altogether, but be careful not to speak in such a way that could cause your child to associate negativity and stress with the concept of money. Your child could develop “money avoidance” tendencies where they resist acknowledging their finances or learning more about budgeting and saving.
Consider using physical cash more often. If your young child only sees things being purchased with a card, they may take longer to understand the concept of money and the value of a dollar!
Another way to indirectly teach a young child about money is to educate them on the difference between wants and needs. When you are very young, it can feel as if you need something that is actually just a want. Be sure to discuss the difference between these terms with your child so that they can learn to categorize the two by themselves. Talk about wants and needs in terms of the consequences they will face if they don’t get to have/do the thing they want or need. This line of thinking will help them prioritize their needs over wants; an essential skill for dealing with money later in life.
How can these skills be expanded as my child grows?
The skills they learn (physical cash, wants vs needs, math) can be applied to their own purchases as they begin to earn and possess their own money. If your child receives money from family members for birthdays or holidays, consider how you will help them use it wisely! Maybe you will offer to hold on to some of the money for them or get them a piggy bank. Try to discuss what they would like to do with the money and make suggestions, but don’t go overboard!
Let them make mistakes. Though it may be tempting to take full control over your child’s money, you need to allow them the freedom to slip up. If, for instance, they immediately spend all of their birthday cash on a video game, they will learn the consequences when they want something else and don’t have any money left over. This is a far more effective lesson than simply being told what to do, so be sure to give your child a reasonable amount of freedom when it comes to spending! By the time they become a teenager, these skills will help them navigate the financial freedom of their first job and beyond.
Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other specialized advice we can provide towards your financial well-being.
Whether you’ve seen the prices at the pump, clicked on the headlines, or overheard discussions in the grocery store, you know the rising cost of gas has everyone talking. At the start of the summer driving season, the average price of regular gasoline in the U.S. reached an all-time high, surpassing $4.50 per gallon. Inflationary pressures, including strong demand, supply chain disruptions, and low inventories, have caused price spikes for many consumer goods. As the cost of filling your tank rises, you’re likely wondering which markets factors caused the spike in gasoline prices.
Costs and Taxes
Crude oil is the most important input cost for gasoline. This commodity is primarily refined into gasoline and other transportation fuels, including diesel and jet fuel. Ethanol, a fuel made from corn, is blended with crude oil to represent 10 percent of gasoline volume on average, according to the Energy Information Administration (EIA). Operating costs associated with refineries, transportation (e.g., pipelines, tankers, trucking), and gas stations, as well as federal, state, and local government taxes, contribute to gasoline prices. Differences in operating costs and taxes explain the wide range of gasoline prices across states.
Higher Gasoline and Crude Oil Prices
Figure 1 illustrates the strong correlation between the prices for gasoline and crude oil, which is currently around $115 per barrel for West Texas Intermediate (WTI), the U.S. index. Prices for both commodities have just about doubled since early 2021. Covid-19 lockdowns in China and plans by several countries to release strategic oil reserves helped ease oil prices in recent months. The price of gasoline, however, has continued to increase.
Figure 1. U.S. Gasoline and WTI Crude Oil Prices, 2007–2022
Source: Bloomberg
Decreased Refinery Capacity
Demand for transportation fuels, such as gasoline, dropped sharply early in the pandemic when consumers stayed home, causing several refineries to close permanently. Global refinery capacity fell in 2021 for the first time in 30 years, according to the International Energy Agency (IEA). U.S. refinery capacity dropped to 2015 levels, as shown in Figure 2. Additionally, existing U.S. refineries have limited spare capacity with utilization rates above 93 percent, the highest since December 2019. Meanwhile, refiners are generating record profits from strong demand, capacity constraints, and a higher spread between prices for oil and refined products, such as gasoline.
Figure 2. U.S. Refinery Capacity, 2007–2022
Source: Bloomberg
Lower Inventory and Higher Demand
Both U.S. gasoline and oil inventories are at low seasonal levels compared to the five-year range, as shown in Figure 3, which highlights U.S. gasoline inventories. Gasoline and oil demand recovered faster than supply over the past two years while the economy bounces back from the pandemic. Refineries typically boost output before demand peaks during the summer; however, capacity constraints limit supply increases. Although the U.S. still imports oil because its refineries were initially designed to process heavy crude produced from other countries, such as Canada and Venezuela, higher U.S. exports have reduced inventories as Europe seeks to reduce its reliance on Russia for energy imports.
Figure 3. U.S. Gasoline Stocks, 2020–2022
Decline in Oil Supply
Global oil producers quickly cut capital expenditures early in the pandemic to preserve cash for debt servicing and other operating expenses amid highly uncertain oil demand and plummeting prices that fell to around $20 per barrel. Figure 4 illustrates the decline in oil production from the OPEC and the U.S., the world’s two largest groups of producers. Supply from Russia, the world’s third largest oil producing country behind Saudi Arabia, also declined after its invasion of Ukraine.
Figure 4. OPEC and U.S. Oil Production, 2012–2022
Source: Bloomberg
Oil Production Constraints
Global oil production is slowly recovering as producers have been more cautiously investing in long-term projects, such as offshore drilling, due to a highly uncertain demand outlook for oil. Traditional automakers, for instance, are investing heavily in electric vehicles amid policy support and plans by several countries to phase out internal combustion engines (e.g., gasoline, diesel) in the coming decades.
Furthermore, shareholders have forced publicly traded oil and gas producers to focus on capital discipline, profitability, reducing debt, and investor returns through dividends and stock buybacks. Production growth was the prior objective from a capital allocation standpoint, but producers struggled to generate positive cash flow and earnings following the 2014–2016 crash in oil prices.
Several other market developments have contributed to a slow recovery in oil production:
S. oil producers focused on drilled but uncompleted wells (DUCs) to limit costs when oil demand began to recover after the pandemic. In other words, producers sacrificed future supply growth by completing existing wells at a faster rate than drilling new wells.
A large portion of U.S. oil supply is produced from shale regions, such as the Permian Basin. Compared to conventional wells, shale wells have high depletion rates that average around 70 percent by the end of the first year, according to asset manager, GMO. This requires continuous capital expenditures to maintain or increase production levels by drilling new wells.
Small private oil producers have been the main source of production growth in the U.S. as opposed to larger publicly traded producers given shareholder demands for capital discipline.
Inflationary pressures and shortages for labor and materials, such as steel, reduced the operating capacity for oil field service companies, which supply oil rigs and other equipment to producers.
U.S. Production Forecasts
The U.S. is the world’s top oil-producing country with supply averaging 11.9 million barrels per day over the past two months. Forecasts from the U.S. EIA imply moderately higher production of about 200,000 barrels per day for the remainder of 2022. Oil production growth is expected to accelerate in 2023 and reach an all-time high, averaging more than 12.8 million barrels per day.
A Look Ahead
For the immediate future (this summer), it looks like gas and oil prices will remain high due to global supply issues, low inventories, and increased travel. There is hope for an ease or decline of prices later in the year with the potential for more supply and lower demand. Please contact my office with any questions or requests for more information on current prices or future forecasts.
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This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide for your financial well-being.
Robert Blakely is located at 1022 Hutton Ln #109 High Point, NC 27262 and can be reached at 336-885-2530
Securities and Advisory Services offered through Commonwealth Financial Network®,
Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products
and services are separate from and not offered through Commonwealth Financial Network®.
Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network®.
The first half of the year is coming to a close. Conducting a mid-year financial analysis can be helpful. Here are some ways to make sure that your financial situation is continuing on the right path.
Reassess your financial goals
At the beginning of the year, you may have set financial goals geared toward improving your financial situation. Perhaps you wanted to save more, spend less, or reduce your debt. How much progress have you made? If your income, expenses, and life circumstances have changed, you may need to rethink your priorities. Review your financial statements and account balances to determine whether you need to make any changes to keep your financial plan on track.
Take a look at your taxes
Completing a mid-year estimate of your tax liability may reveal new tax planning opportunities. You can use last year’s tax return as a basis, then factor in any anticipated adjustments to your income and deductions for this year. Check your withholding, especially if you owed taxes or received a large refund. Doing that now, rather than waiting until the end of the year, may help you avoid owing a big tax bill next year or overpaying taxes and giving Uncle Sam an interest-free loan. You can check your withholding by using the IRS Tax Withholding Estimator at irs.gov. If necessary, adjust the amount of federal or state income tax withheld from your paycheck by filing a new Form W-4 with your employer.
Check your retirement savings
If you’re still working, look for ways to increase retirement plan contributions. For example, if you receive a pay increase this year, you could contribute a higher percentage of your salary to your employer-sponsored retirement plan, such as a 401(k), 403(b), or 457(b) plan. For 2021, the contribution limit is $19,500, or $26,000 if you’re age 50 or older. If you are close to retirement or already retired, take another look at your retirement income needs and whether your current investment and distribution strategy will provide the income you will need.
Evaluate your insurance coverage
What are the deductibles and coverage limits of your homeowners/renters insurance policies? How much disability or life insurance coverage do you have? Your insurance needs can change over time. As a result, you’ll want to make sure your coverage has kept pace with your income and family/personal circumstances. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased.
Ask questions
Finally, you should also ask yourself the following questions as part of your mid-year financial checkup:
Do you have enough money in your emergency fund to cover unexpected expenses?
Do you have money left in your flexible spending account?
Are your beneficiary designations up-to-date?
Have you checked your credit score recently?
Do you need to create or update your will?
When you review your portfolio, is your asset allocation still in line with your financial goals, time horizon, and tolerance for risk? Are any changes warranted?Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
Doing that mid-year checkup will help you maintain course and achieve your goals. The team at Blakely Financial is always here to help, so call us today!
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide for your financial well-being.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.
Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.
