Inflation and Ukraine War Fuel Market Volatility
Economic turmoil and geopolitical events have landed on our doorstep and nearly all investors have felt the impact. The headlines can be disturbing, but this is a time to stay the course, talk to your advisors and keep your long-term goals in mind.
The leading causes of volatility in today’s financial markets are the significant rise in inflation in recent months, fear of a continued interest rate increases, and the war in Ukraine. Continuing economic upheaval is complicating an already complex scenario created by lingering supply chain disruptions caused by the COVID-19 pandemic.
Energy prices were already on the rise before the invasion of Ukraine, in part due to inflation and a reduction in U.S. oil production over the past 14 months. The situation has been exacerbated by the ban on imports of Russian oil imposed by the U.S. government. Although Russian oil accounted for less than 5% of the U.S. market, any disruption of the global oil flow creates chain reactions that drive up prices quickly. If the crisis in Ukraine continues, it will put more pressure on energy prices across the board.
The continuing supply chain disruptions caused by the COVID-19 pandemic combined with rising inflation and the war Ukraine will continue to disrupt markets this year. Though the S&P 500 is down for the year due to the economic uncertainties, the market had a good run last year and some felt the market was overvalued at the end of 2021. A 10% market correction is normal, so investors should feel comfortable with where the economy is at today.
It’s unknown whether the market will go lower. We don’t forecast a recession short term, but we expect there will be continued pendulum swings in the market the rest of 2022 as we look for stability.
The volatility is fueled, in part, by anticipation of interest rate hikes by the Federal Reserve. The Fed boosted short-term interest rates by 25 basis points (one-quarter of 1%) in early March and has signaled that further rate hikes are likely in 2022. The Federal Reserve has projected four to six interest additional rate hikes this year as the Fed tries to cool down inflation, which stands at about 7.5% – the highest since the 1980s.
The goal with interest rate hikes is to try to slow down demand. Today’s inflation is, in part, attributable to a significant amount of money pumped into our economy, continued supply chain disruptions caused by the COVID-19 pandemic, which have been artificially stoking demand. We think consumer demand will remain high throughout the year, as the U.S. economy is doing well, but first and second quarter Gross Domestic Product (GDP) will be a good indicator to how our economy is adjusting to ambiguity.
Though consumer confidence has slipped a bit, spending appears to be strong and continues to support the economy. Consumer discretionary spending may slow down later in the year if inflation and energy prices remain high. The summer travel season will be indicative of high gas prices at the pump and how inflation has affected consumer spending.
Outlook for Investors
The technology sector has taken the brunt of today’s volatility, as it is down more than 20% in early March but has been recovering since. While this is dismaying for investors who hold tech stocks, it also creates opportunity, particularly for active investors. Tech is not going away. Long term technology has the highest potential for the growth in the next decade, but also can be the most unpredictable. Now may be a good time to do some bargain shopping for tech stocks.
For more risk averse investors, this is an opportunity to rebalance and make sure you are positioned in a diversified portfolio. Historically, value stocks have done well and are a good hedge against inflation. Interest rates will continue to put pressure on bonds to perform, so the primary concern for bond holders is to make sure you have a well-diversified bond portfolio.
Investors who are close to retirement – within two to three years – should have a conversation with their advisors to ensure they’re on track.
If your retirement is at five years or more out, you can stick with your long-term strategy. Be sure to talk to your advisor, take action to rebalance your portfolio and discuss any short-term goals such as new vehicle or a new home.
A To-Do List
- Meet with your advisor and discuss how your goals may have changed.
- Earmark any cash you may need in the short term.
- Stay diversified
- Remember that investing and saving for retirement is not a sprint – it’s a marathon.
If you would like to discuss your saving and investing goals, contact your Adams Brown wealth consultant.