Financial Markets Respond to Inflation and Now War

Matt Wright, CFA® |

Despite the toll of COVID-19 on the global economy, stock market returns were favorable in 2020 and 2021. The first 2 months of 2022, however, have not been so kind, reminding us that long-term growth in capital comes with risk.

While the U.S. economy has recovered faster from the COVID-19 drop than most other countries, we and much of the world are facing a surge in inflation not seen in decades. The Federal Reserve is about to shift from an accommodative stance to a restrictive one in an effort to bring inflation rates down. While forward-looking indicators imply that inflation rates will normalize in the coming years, both stock and bond prices have declined as expectations of Fed interest rate hikes have accelerated.

And now the Russian invasion of Ukraine is creating additional stresses to the financial markets. Energy markets will remain volatile given the uncertainty around oil and gas supply interruptions in Europe, while sanctions on Russia will cause various degrees of disorder throughout the worlds’ payment systems.

So what is an investor to do in a distressing time like this? We’re giving you the same advice as we did when COVID-19 hit in 2020: stick to the plan. A long-term investing strategy only works if you use it through both good and bad times, because there is no way to only pick the good times.

As always, SWA monitors client portfolios on a continual basis, looking for opportunities to rebalance portfolios, harvest tax losses, manage cash flows, etc. Highly volatile markets can often result in you seeing more trading in your accounts than usual, but this doesn’t mean that SWA has changed how it manages your portfolio – it just means that more action is needed to keep your portfolio in line with the strategy goals. It is never our intent to change a client’s target stock/bond mix (up or down) without the client’s approval. For example, if SWA sells bonds and buys stocks in your portfolio, it is not because we are choosing to increase your risk level – we are just restoring your portfolio to your target allocation.

As is always the case, if you have had a change in financial circumstances that may justify a change in investment strategy, please contact your advisor to discuss.