The start of 2022 has seen an uptick of volatility in the global markets, with new storm clouds emerging that were not present just a few months ago. Two main events have shaken the markets and continue to cloud economic visibility.
The invasion of Ukraine by Russian troops is causing both a humanitarian and supply chain crisis. Companies have seen their supplies squeezed tighter as the US and many other western nations have enacted sanctions. Many corporations from Exxon and McDonalds to General Electric and Starbucks have withdrawn operations in Russia, muddying the expectations of supply for oil, wheat, nickel, uranium and more. If the aggressive action of Russia persists, we expect these and other raw materials will continue to be impacted.
The second main event that has led to the recent market pullback is inflation. The cost of goods priced in dollars has been on the rise since late 2020. Price inflation has expanded and is impacting both corporations and consumers. The markets are watching intently to see how government and central bank policy will react to combat inflation, seeking to bring it back to lower and long-term averages.
Think of inflation like an accordion. A slow expansion of prices has pulled inflation slightly further/higher, a reality only exacerbated by the Ukrainian occupation. There are signs that we may be nearing peak price inflation, the point at which the accordion is stretched furthest out. Then it slowly squeezes back together as it was before. With the markets always looking ahead, this news of peak inflation, when it comes, will be welcomed by investors.
How should we react to times of volatility?
With both of these major economic events occurring simultaneously, what does that mean for you?
Some will rush to full safety, pulling out investments, trying to time the market, and invest the money back at some later time, but that’s not our recommendation.
It is impossible to know when the market will make a reflexive move higher. (Just two weeks ago, the first day of the Russian aggression into Ukraine, the US markets opened down a little over 3%. By just after lunch that day, literally 5 hours later, the markets were 3% up on the day, a 6% swing in a matter of hours.) Selling investments wholesale could – and often does – lead investors to miss out on returns.
Also, selling investments in down markets almost always leads investors to wait to re-invest their monies, usually after they are higher than they were before they sold them in the first place. Selling now to buy at lower prices is a short-term reflex that can ultimately leave your portfolio at risk of permanent impairment. (According to BlackRock, an individual who started with $100,000 on January 1, 2002 and remained invested through December 31, 2021, “would have accumulated $616,317, while an investor who missed just five of the top-performing days during that period would have accumulated only $389,264.”)
A measured approach to investing
Cook Wealth takes a balanced approach to any volatile market with a concrete set of principles to create better outcomes for our clients.
First, we research what has changed economically and how we can make small and measured portfolio adjustments for our clients’ best interests. Right now, that means working to ensure our portfolios are protecting where they can without spending time away from the market.
Diversification remains the best defense. Ensuring our clients have a basket of stocks, bonds, and alternatives helps as certain parts of the market react differently than others. For example, as we look for the market to find a bottom and rebound, we are watching current stock values versus where they were before the COVID crisis. What we are finding is that small companies are actually nearing the low levels seen in previous market downturns. Further, the US markets have contracted to a level where expected earnings for 2022 make many of these companies look like valuable long-term assets.
As we trudge through big swings, down days and up days, it’s important that we don’t allow either fear or euphoria to impact our long-term goals. Market volatility can cause rash decisions that often lead to adverse outcomes. We will continue to take a measured approach, rebalancing our asset classes and looking beyond the current storm clouds with long-term returns in mind.
In the meantime, remember we’re monitoring your portfolio so you don’t have to! We’re here. Stay the course.