The news about the invasion of Ukraine is distressing on a humanitarian level and unsettling when thinking about the impact of increased volatility on investment portfolios.
Added to already high inflation and the market's uncertainty around the Federal Reserve's future interest rate increases, markets are now reeling from the added pressure of what will likely be more aggressive sanctions.
Hampton Park Financial Planning would like to break it down and let you look at some of the threads we're tracking:
The markets have been reacting to a high inflation number and the impact on Fed rate increases, expecting a 50-basis point increase in March. The Fed has worked to be transparent in its messaging and comments from N.Y. Nevertheless, Fed Chairman Williams and Governor Brainard were clear about the new expectation that the Fed would raise rates by 25 basis points at the March meeting.
Like the rest of us, the Fed has undoubtedly been monitoring the situation in Ukraine very closely. The Fed has been committed to observing the data and telegraphing potential moves to markets ahead of time. However, it is also retaining optionality to keep markets and the economy on as even a keel as possible.
Oil prices pushed above $100 a barrel for the first time since 2014. While this will benefit oil producers, it will complicate the inflation picture and hit already high prices at the pump. It may, however, be short-term. If the conflict resolves – or another producer is found (Hello, Iran/Saudi?), the spike could be temporary.
Markets Have Shifted to “Risk-Off”
Equity markets have dropped and may see further volatility, with the VIX (the so-called Fear Index) opening at 37 Thursday morning, an increase from Wednesday’s close of 31. A reading above 20 indicates increased volatility. As of Thursday’s close, it had fallen to 30, as investors processed the likely impact on markets.
Since one of the main drivers of the U.S. economy is consumer spending, and high inflation rates have not put a damper on that yet, it remains likely that consumer behavior will not change. This may help to backstop markets.
The bond markets are now seeing a drop in yields as investors flee to less-risky assets and push prices up (prices move inversely to yields). This is a reversal of what we saw earlier in the week, as the Fed news on rates pushed yields up. Bond prices essentially closed negative in January, and the return to less risky assets may be a silver lining that lifts bond performance.
What Should Investors Do?
Your long-term financial plan is built to withstand shocks like these. While we can't know the full impact of the invasion or the duration of the crisis, the pressure points of increased inflation and extended supply chain disruptions have been part of the ongoing picture. Taking a cue from the Federal Reserve's playbook of waiting to get data and letting geopolitical tensions settle before making moves with long-term impact can stand individual investors in good stead.
Your comfort in your plan is paramount, and ensuring your portfolio is tailored to your risk tolerance is important. Staying the course so you do not miss out on the recovery is important.
We are always here to answer any questions or just have a conversation. We'll be monitoring the situation for our clients, as we always do.
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