An update on geopolitical events affecting your portfolio
Stock markets worldwide whipsawed this week as investors weighed the implications of Russia’s invasion of Ukraine and the Federal Reserve’s policy decision concerning inflation and interest rates. This week continues to be an emotionally challenging one, particularly with headlines from media outlets eliciting thoughts of worst-case scenarios. With that being said, it is important to remember that human lives are at stake and our thoughts and prayers are with those affected by this unnecessary tragedy. As we wrote in our last strategy update, we would not be so bold as to speculate on what the ultimate outcome is here, but we do want to remind you of the facts we know and the processes we have in place should things get worse – or, more likely, better.
WHERE TO FROM HERE?
Investors' reactions to geopolitical events such as the current one have historically been severe and short-lived. In the midst of all this negative news, indexes still remain well within normal correction territory. This most recent correction may feel worse given the historically low levels of volatility experienced during the previous 18 months. The recent uncertainty is a good reminder of the importance of a well-constructed, personalized, and long-term wealth plan. Our planning model factors in normal market volatility, as well as catastrophic decline, so you can feel confident in your planning results. If you have not completed planning with us or have had a significant life change, please reach out to your Main Street team, and we’ll gladly schedule a time to begin this process. As a reminder, there is no additional cost for this service.
The ‘black swan’ event of a wider war involving NATO or the U.S. is highly unlikely at this juncture, with all major powers making this point abundantly clear. The sanctions being placed on Russia as of this writing have not included oil – Russia’s largest export and a key pillar of their economy, which stands as the 12th largest in the world. Implications of oil sanctions would create higher energy prices – a new wrinkle for the Federal Reserve which is already balancing larger inflationary pressures stemming from a strong economy. Interestingly, markets have drastically reduced their expectations of a 50-basis point interest rate increase come the next Fed meeting in March. We would reiterate that monetary policy decisions over the next year remain the most important variable in purely economic terms. Economic and corporate profit data remain healthy to start the year and continue to show signs of expansion – particularly as the global economy continues to rebound from the COVID-19 omicron variant.
PORTFOLIO POSITIONING, REALIZING GAINS & HARVESTING LOSSES
As we entered 2022, we described the environment as ‘bumpier but bullish,’ which may have been the understatement of the year thus far! We still share that view describing ‘Phase II’ of the market cycle which features modest, yet positive economic growth and a change of leadership as investors reassess expectations around inflation and interest rates. Simply put: what worked the last 18 months may not work the next 18 months, hence our approach to actively managing sector selection. You may have noticed a flurry of activity over the past two months rotating into sectors like energy, healthcare, materials, consumer staples, and select technology names that fit the bill.
Given the material change in leadership from a sector level, we have taken gains in some cases to protect against catastrophic declines or rotate the capital into places that are healthier in this environment. We have also tactically harvested capital losses during this volatility to help offset gains in the spirit of our tax-efficient style. Our colleague, Aaron Stern, recently wrote a great article that articulates the merits of such an approach and can be found here.
Portfolio cash levels remain elevated, as they have been since the start of the year. While cash has increased in your portfolio, we do anticipate this being temporary. Our ‘safer rather than sorry’ mantra is warranted particularly given the generous returns markets have provided over the past two years. We will continue to thoughtfully reinvest into quality assets, as volatility can breed opportunities.
We hope this note is helpful and creates some peace of mind heading into the weekend. We sincerely appreciate the continued vote of confidence in our team and our work.
If you know of friends or family that can benefit from a no-cost portfolio review, please do not hesitate to reach out.