• Michael Schreiber

Market Impacts of War and Monetary Tightening



There are many forces in the world, and the economy, impacting how we perceive our finances and investments. Numerous factors are straining the markets right now – the war, inflation, supply-chain disruptions, the pandemic, and looming midterm elections. We understand that some investors are feeling nervous. Please know that we want to hear from you. We appreciate the opportunity to have personalized conversations and look forward to discussing the markets, the outlook of the economy, and your portfolio.

 

KEY TAKEAWAYS

  • The initial economic consequences of the war are easier to predict. Additional longer-term ramifications are harder to forecast and may cause more significant uncertainty to financial markets and economies.

  • Supply chain disruptions are widespread and likely to have further inflationary consequences during a time when price pressures are already difficult to contain.

  • A range of interest rates, such as mortgages and consumer credit, are based on the Federal Funds rate. When rates rise, the cost of borrowing increases, which helps to temper prices and prevent the economy from overheating. Consumers are unlikely to feel many pinches from rates rising until more increases occur.

  • Higher interest rates are also likely to impact business valuations and corporate earnings.

  • The Aevitas Wealth team pays careful and thorough attention to your portfolio and makes adjustments as needed. We appreciate your business and trust and look forward to hearing from you.

 

Impact of the War in Ukraine


The Russian invasion of Ukraine has disrupted many assumptions about the near-term direction of the economy and markets, and the situation is changing daily. Despite the unprecedented sanctions that have severely restricted Russia’s financial activities and operations, the Russian assault on Ukraine continues to intensify. The West has united in isolating Russia from the global economy, and it is important to understand the economic consequences. The supply-chain disruptions resulting from the war are rippling across the globe and exacerbating the inflationary pressures that we were already feeling. Investors are left wondering if the current situation could lead to a recession. Outside of Russia, the biggest risk of recession is in Europe due to geographic proximity and a heavier reliance on Russian energy.

For more than a decade, the markets have helped boost investor confidence, and there have been relatively few reasons to worry; it is possible that the war in Ukraine will significantly change the investing landscape. Russia is a major supplier of metals used in everything from batteries to cars and trucks. Almost one-third of global wheat exports come from Russia and Ukraine, and the two countries are a key source of the gasses used to produce semiconductors. Further, the conflict is likely to reshape domestic and foreign policies in areas as far-reaching as diplomatic relations to pipeline construction, impacting commodity pricing and currency valuations. The Aevitas Wealth team is here to guide you through investing calmly during these chaotic times.

The Federal Reserve Begins Tightening Among the news this week was the Federal Reserve’s expected announcement that it would increase the Federal Funds rate by a quarter of a percentage point. This long-awaited hike was no surprise. The Fed tries to control rising inflation by raising borrowing costs for consumers and businesses to slow the economy just enough to temper demand and allow inflation to moderate. The markets had already priced in the increase and are more focused on the Fed’s guidance on the economy’s outlook, inflation, and future rate hikes. Federal Reserve Chair Jerome Powell said that he believed the economy remains strong enough to carry out a series of rate hikes, suggesting a cycle of gradual rate hikes over the next two years. While we remain concerned that the Fed did not react quickly enough and waited too long to raise rates, the message is clear that the Fed is focused on fighting inflation and will continue to tighten until it reaches its goal.Throughout history, rising interest rate environments provided a weaker environment for stocks, and we will be closely studying the cumulative effect of these rate hikes and what it means for the economy, markets, and our clients. Despite the headwinds the markets may be currently facing, there continue to be opportunities for investors. Even during times of tighter monetary policy and war, there will still be attractive areas to invest in, such as those we are seeing in energy and defense companies, and other quality, dividend-paying stocks. Investing in equities remains the best way to fight inflation, with staying invested over the long-term the best way to protect your purchasing power. The Aevitas Approach to Staying Disciplined and Patient Particularly in these uncertain times, it is more important than ever to remain disciplined and stick with your long-term investment strategy. We understand that sometimes this is easier said than done, but the current crisis is not a reason to abandon a carefully constructed financial plan. Especially in periods of turbulence, the Aevitas team recognizes the importance of both ballast and seizing opportunities created by uncertainty in the markets. We do not know the future and cannot totally insulate from market risk. However, our well-diversified portfolios are designed to help cushion against losses, and we continue to rebalance as appropriate.Additionally, we have ensured that our clients have enough cash to meet their upcoming needs. There is no way of knowing how long the war will last or what the exact effects of the Fed’s actions will be, but we do know that one of the cardinal virtues of investing is patience. The Aevitas team is giving close and thoughtful attention to how the economic outlook evolves and is continuing to monitor and adjust for risk in all of the portfolios we manage. As always, our team appreciates hearing from you and is available to discuss your portfolio and address any questions or concerns.



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