Thoughts on Inflation, the Economy, Investment Strategy and the Crisis in Ukraine
My Dear Client Community, One of our Client Community members voiced his concern given what’s been going on in Ukraine, which has further escalated within the last few days. He inquired as to whether I would recommend changes to his portfolio based on these geopolitical events and his particular financial situation. I write this post given that his concern may be shared to some extent by other members of our community. So what follows are some of my thoughts that I’d like to share with you.
As you’ve heard me say many times before, if you’re in the asset accumulation phase of your life, you should approach events such as this and any negative repercussion on stock prices as an opportunist. You should take advantage of depressed prices to buy at below average cost so that when the inevitable uptrend returns, you experience above average returns.
If you’re in the drawdown phase of you life, then you know the drill because we experienced something similar in 2020: Should your portfolios decrease in value sufficiently, we’ll begin sending you distributions from your Emergency Cash Reserves. Once your portfolios recover, we’ll resume creating income for you by selling securities rather than further depleting your Emergency Cash Reserves. We’ve all been there and done that.
Recent Russian/Ukraine events have to do mostly with energy, which is an important source of Russia’s GDP. Russia supplies 40% of Europe’s heating fuel, in the form of natural gas. One of the two aging pipelines through which the gas is transmitted runs through Ukraine, which had lately evinced a growing yearning for increased ties to the West. Perhaps even going so far as to join NATO. Putin could never allow this.
How the Russian/Ukraine situation will play out is anyone’s guess. I vote for diplomacy and a peaceful resolution but that may not be in the cards. Regardless, Russia’s overwhelming military vis-à-vis Ukraine, point to this being a short-lived and contained event.
The markets have at times experienced significant volatility since the beginning of 2022. Most of the volatility is tied to uncertainty regarding Federal Reserve moves concerning interest rates and inflation. The Russia/Ukraine complicates the picture for the Fed. However, the Fed’s mandates are full employment and price stability so they will continue to do what they can to uphold those mandates. This is a good thing.
The markets have sold off since the beginning of 2022. This is not unusual market behavior. It’s important to remember that the market does take regular “breaks” before resuming its historical uptrend. And as you’ve heard me parrot, on an annual basis, the average market down is 15%. We haven’t had a selloff anywhere near 15% since Covid came into our lives in March 2020. My point is that we were due for some sort of setback.
The underpinnings of the U.S. economy as well as the developed world’s economy, are quite strong due to the amounts of stimulus governments unleashed and continue to unleash in reduced fashion. U.S. businesses are profitable and businesses, as well as individuals, are flush with trillions of dollars in cash. We continue to re-open after Delta and Omicron and the economic prospects are sanguine.
I would be glad to schedule a time to speak with any community members that have additional questions or concerns.