Market Point: Investing Through War and Inflation
We begin this quarter’s commentary by acknowledging the tragedy in Ukraine. The death toll and physical infrastructure losses remain mostly shrouded in the fog of war, but they are devastating. The spirit of the Ukrainian people in the face of such darkness has been inspiring. We are encouraged by the swift and united response to the invasion by world leaders in the form of the most punitive sanctions ever to be placed on one country.
We hope for an end to Putin’s aggression and for the difficult task of rebuilding to begin. Still, as investors, we must stay focused and do our best to understand how the conflict and sanctions might affect the economy and financial markets.
Even before the Russia-Ukraine war, investors were navigating choppy markets. The volatility that began in late 2021 continued into the new year as investors priced in the effects of surging inflation and looming interest rate hikes by the Federal Reserve. Each of the three major indices ended the quarter with its largest decline since March 2020. January and February felt like a roller coaster as the market officially corrected, falling more than 10%, after nearly two years of uninterrupted quarterly gains before recovering modestly in March.
And yet, the global economy continued to show strength. The U.S. unemployment rate dropped to within 0.1% of its pre-pandemic level after employers added 1.7 million jobs in the first quarter of 2022. Americans, many of whom contributed to a record personal savings rate during the pandemic, enjoyed a return to normality by participating in the activities they had been forced to abandon in March 2020, with recent reports on restaurant dining and travel showing levels not seen since 2019. And corporations and their investors benefited from the reopening momentum, with strong, albeit slowing, earnings growth that is projected to continue to rise into the medium term.
This environment of conflicting signals has investors and everyday Americans wondering, “Why do things feel like they are getting worse?” Perhaps the two biggest factors that contributed to increased volatility were the continued rise in inflation and the anticipated actions that would need to be taken by the Fed to address it. In March, we learned that the Consumer Price Index, a key measure of inflation, had grown by 7.9% over 12 months, setting a 40-year high. Every consumer spending category in the index experienced increases, although meat (13%), energy (25.6%), and used cars and trucks (41.2%) saw the most dramatic year-over-year rise in prices.
Government stimulus and rising wages have contributed to tremendous pent-up demand among eager consumers, particularly for goods instead of services. And while supply chains problems appear to have peaked, a full recovery will take some time. Adding to the uncertainty is the ongoing potential for new disruptions, as seen in March when China imposed new lockdowns amid rising COVID-19 cases, disrupting manufacturing operations for some of the world’s biggest automakers, including Volkswagen, Toyota, and Tesla.
Policymakers had initially hoped that alleviating pandemic-fueled supply chain issues would solve the problem. But with inflation appearing to be more persistent than temporary and the war in Ukraine exacerbating inflation in commodity prices, the American central bank acted in March to address the demand side of the equation, raising interest rates by 0.25% and signaling that it plans six more hikes by the end of this year.
The Fed is in the unenviable position of trying to thread a moving needle. On the one hand, it doesn’t want to raise rates too fast and send the economy into a recession by halting economic growth and putting people out of work. On the other hand, it risks not doing enough to keep inflation from spiraling out of control, which would cause more drastic and potentially more painful policy actions in the future.
With interest rates historically low and an employment situation that is complex but in a moderately strong position, the Fed has room to operate. Interestingly, interest rate hikes don’t necessarily correlate to drops in the stock market. Since 1954, the S&P 500 index has gained an annualized 9.4% on average during rate-hike cycles. However, there are no guarantees that this cycle will go as planned, with an already complicated situation compounded by the Russian invasion of Ukraine.
The aggressive sanctions imposed on Russia by the U.S., European Union, and U.K. have demonstrated a remarkably united front against Vladimir Putin and his regime. But the sanctions and the conflict itself will continue to come at a cost to investors. Most worrying is the potential for sustained inflation in commodities – specifically energy (oil and gas), metals, fertilizers, and food. The potential downstream impacts from disruptions are vast, and no one can know quite where things land in terms of the war and sanctions, underscoring the need for investors to be prepared for continued volatility in the coming months. What we do know is that the market has generally rebounded quickly after initial hostilities in an international conflict, including during World War II, the Korean War, and the Vietnam War.
During times like this, it is important to remind yourself that successful investing and long-term financial health can be best achieved by staying invested over the long run, regardless of short-term gains and losses. We anticipate continued volatility yet remind our clients that market corrections are hallmarks of a normal and functioning market. Since World War II, there have been 84 stock market corrections in the 5-10% range, and nearly 30 that were greater than 10%. In each instance, the market has bounced back and recovered from its declines.
Volatility creates opportunities for investors who can withstand the stress of a declining market, as stocks are repriced with more attractive valuations. Warren Buffett once said, “Be fearful when others are greedy and greedy when others are fearful,” and data has shown that to be valuable wisdom. On average, buying stocks when market confidence is at a high will return around 4% over a year. In contrast, buying in a confidence trough yielded 24%, underscoring that economic sentiment shouldn’t be the sole factor in making investment decisions.
We are watching the Fed, geopolitical developments, and the economy closely, and adjusting client portfolios to balance short-term risk with long-term opportunity. In thinking about inflation concerns for quite some time now, our investment committee has focused on companies with strong pricing power and reduced exposure to rising input costs. We will continue to stay focused on building portfolios positioned for growth while also being humble enough to acknowledge that the current environment presents challenges and may last for a while. During all market cycles we believe it is important to maintain buffers such as cash and more conservative securities to protect against the unexpected. Please be in touch if you want to review your positioning or if your needs have changed.
4 https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf (page 7
Spring Cleaning for Your Finances
This spring-cleaning season might be the perfect time to kill two birds with one stone and tidy up your financial life as you get your living space in order. Much like your home, cluttered and unorganized finances can negatively affect your day-to-day life. By focusing on cleaning, simplifying, and organizing, you can help to reduce stress and increase your preparedness. Below are some helpful tips we have compiled to get you started. As always, feel free to reach out to our team if we can assist in any way.
Organize and Secure Important Information
While sifting through and organizing the accumulated paper in your home office, take note of your important documents. Are they located in an accessible and secure location? Before determining a safe place to keep those records, consider the individuals who might require those documents later. Are your loved ones informed about where to access documents such as your will, power of attorney, car title, and life insurance policy?
As you compiled your important documents, you likely identified a pile to discard. Take note of anything with sensitive information and arrange for it to be shredded. Another easy way to declutter is to go “paperless” and receive digital statements, bills, or notifications. Many financial institutions, including Obermeyer Wood, will upload your sensitive documents into a client portal that provides better security and organization.
Lessen the Load
Keeping track of your finances can be tiring, but one way to lessen the cognitive load is by automating as many items as possible. What bills, expenses, or reoccurring account distributions can you put on automatic pay or withdrawal? You may also have several accounts open that serve similar purposes. If that is the case, consider consolidating your accounts to simplify and gain greater clarity into your overall financial situation.
Nurture a welcoming environment
Similar to how you would like your home to be a welcoming place for all who enter, your finances should feel equally inviting for you and anyone you want to share them with. As you dust off old books and picture frames, recall your family’s values passed down from generation to generation. When reviewing your finances, adjust your frame to capture the long-term vision for your wealth. Have you thought about and communicated with your loved ones about what you want your financial legacy to be? Family conversations around money can be difficult, but they tend to pay off for future generations who can learn more about the wealth they may stand to inherit. One effective way to do this is to engage your financial advisor to facilitate these important discussions with your family. If you would be interested in having us host a family meeting, please let us know.
What are we listening to?
Here are four more of our favorite listens for investing and personal finance:
Host: Mike Townsend, Charles Schwab’s Washington-based political analyst
Townsend explores topics emanating from the nation’s capital, where he gives his nonpartisan perspective on the happenings that matter most to investors. His guests also offer actionable steps for what to do — and what not to do — with your portfolio.
Why we like it: Townsend offers an experienced and engrossing look at how the politics and policies coming from Washington affect our finances, portfolios, and the markets.
Host: Jack Hough, Barron’s columnist and associate editor
Meme stocks, oil refining, bitcoin – no matter the topic, Hough and his industry expert guests know how to distill it to make sense to everyday investors. A former investment advisor and columnist for The Wall Street Journal, Hough brings a depth of experience and a wry sense of humor to the microphone.
Why we like it: Hough offers “the lowdown on high finance” in his entertaining and engaging weekly podcasts. His ongoing banter with his audio producer is a bonus.
Host: Obermeyer Wood’s Efrata Kirose
Helping our clients pass on successful habits to the next generation is something we strive to do as a firm. With that in mind, each bite-sized episode of our podcast aims to teach young adults the building blocks of personal finance.
Why we like it: From investing to budgeting to building a credit score, Kirose and our in-house experts bring a fresh perspective to each topic in 10 minutes or less.
Host: Mary Beth Franklin, CFP and Investment News contributing editor
Franklin is an expert on Social Security, Medicare, and retirement income. In the fourth season of her popular podcast, she unpacks topics ranging from the titling of real estate assets to the increase in Social Security’s Cost-of-Living Adjustment.
Why we like it: While Franklin covers various retirement-related topics, recent episodes also highlight issues of particular interest for female investors.
These podcasts can be found on the major listening platforms, such as Apple Podcasts and Spotify, but our team is always happy to help if you need assistance finding them. Happy listening!
Firm Update: Obermeyer Wood Recognized
We are excited to share that the Obermeyer Wood team was recognized with three industry awards in the first quarter of this year.
In February, Ali Phillips and Dana Nightingale, CFA, CFP® were named by Forbes and SHOOK Research to the annual ranking of Top Women Wealth Advisors. Our team has received this award for six consecutive years, and we are proud to be consistently recognized on a list highlighting the importance of gender diversity in our industry. And later in the month, Denver Business Journal recognized our firm in its “2022 Colorado-based Investment Managers” ranking for the seventh consecutive year.
In March, Phillips and Wally Obermeyer represented our firm on Barron's Top 1200 Financial Advisors ranking. We are honored to be recognized as the highest-ranked independent advisory in Colorado. For the second year in a row, Obermeyer Wood is the only independent firm in the state with two advisors on the list.
“These awards reflect our entire team’s hard work and client-focused efforts,” said Obermeyer. “At the end of the day, we want to thank the individuals, families, and organizations we are lucky enough to work with. They place enormous trust in us by allowing us to partner with them to achieve their long-term goals through thoughtful and focused investing, sound financial planning, and strategic guidance on issues of all shapes and sizes. We are grateful for the meaningful and collaborative relationships we enjoy with our clients.”
For more details on these awards and links to the rankings, please visit the News section of our website.