The Current Outlook and What We Are Doing for Clients

Geopolitics and Inflation

We want to provide some perspective on the situation in Ukraine and world markets. Sudden geopolitical events typically create uncertainty, which impacts the market value of investments. The closest analogy we can find to the turmoil in Ukraine is the 1962 Cuban Missile Crisis. We have studied that market closely this week, as events have unfolded. A great power struggle largely centered upon saving face and maintaining international respect is playing out. Fortunately, as concerning as this is, these events are historically short-lived and result in relatively quick recoveries.

Nonetheless, the depth and breadth of the sanctions imposed upon Russia are substantial, as is Europe’s assertiveness in defending their interests, which leads us to suspect there may be some longer-term structural changes occurring in world commerce. In the short term, Russia and Ukraine’s oil and natural gas pipelines, as well as grain production, have led to much higher energy and commodity prices. Sustained price increases could hamper the Federal Reserve’s effort to control inflation. Long-term, consumer staples including the typical toothpaste and toilet paper producers, as well as I-Cloud storage and internet services will likely remain in high demand.

We mentioned in our Q1 newsletter the markets were primed for inflation and higher volatility in the first half of 2022. As a result, in January we increased energy holdings and reduced exposure to technology, which has helped mitigate losses and we intend to continue in that direction.

The Outlook and What We Are Doing

At the outset of 2022, the market indicated an assumed interest rate increase of approximately 1.75%. The current outlook reflects a more moderate increase of 1%, as the Federal Reserve attempts to balance continued economic growth against inflationary pressures. Those changed assumptions present an opportunity to rebalance and redirect investments.

We do not see supply chain issues subsiding in the coming year, which may result in increased commodity prices. Therefore, we will be increasing the allocation of client portfolios amongst companies that produce a wide spread of energy, metals, and soft goods such as grains, fruit, and livestock. Investments such as these typically offer the best upside return during inflationary periods. These changes will be enacted over the coming days, and we will continue to watch the markets closely.

As always, we’re just a phone call away if you have questions or want to talk.