It goes without question, the news about the invasion of Ukraine is distressing on a humanitarian level and further 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 the war, sanctions, and its impacts.
Let's break it down and look at some of the threads we're tracking.
Since the beginning of the year, the markets have been reacting to high inflation and the impact on upcoming Fed rate increases, with some even expecting a 50-basis point increase in March. That said, this Fed has consistently worked to be transparent in its messaging and recent comments from N.Y. Fed Chairman Williams and Governor Brainard keep the expectation as the Fed will 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 monitoring the data and telegraphing potential moves to markets ahead of time. We don’t have any reason to believe that will change.
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. Borrowing the line from the Fed, this could be transitory. If the conflict resolves – or another producer is found, the spike in oil could reverse.
Markets Have Shifted to “Risk-Off”
Equity markets have dropped and may see further volatility, with the VIX (the so-called Fear Index) elevated. A reading above 20 is considered increased volatility. As of this article, the VIX is over 30.
The bond markets are also now seeing a drop in yields as investors flee to less-risky assets and push prices up and yields down (prices move inversely to yields). This is a reversal of what we saw earlier in February, as the Fed news and worries have been overshadowed by the Ukraine situation. Bond prices largely closed negative in January, and the return to less risky assets may be a silver lining that lifts bond performance. This highlights a very big reason why bonds have a place in your portfolio, even in a rising interest rate environment.
What Should Investors Do?
Your long-term financial plan is built to withstand shocks like these. We certainly don’t know the full impact of the invasion or can’t predict the duration of the crisis. The pressure points of increased inflation and extended supply chain disruptions have been part of the ongoing picture. We believe taking a cue from the Federal Reserve's playbook of waiting to get data and letting geopolitical tensions settle before making moves is a smart strategy.
Your comfort in your plan is paramount, and if you are feeling uncertain, give us a call. Keeping your long-term goals and horizon in mind when navigating volatility is critical. We are always here to answer any questions or are available to just have a conversation.
This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website. River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.