With the unfolding Russia/Ukraine war, commencement of the U.S. Federal Reserve’s long expected monetary policy change to hike overnight interest rates, widespread concerns over shortage-induced price increases for energy and food, and further COVID-related lockdowns in China, these conditions have produced a high degree of uncertainty to start 2022 and have caused material adverse financial market conditions along with elevated price volatility. As many have heard us comment throughout the years, the markets typically deal well with bad knowns, but otherwise do a remarkably poor job of dealing with unknowns. In this commentary, we want to give you StrongBox Wealth’s straightforward perspective on inflation, interest rates, the Russian invasion, and the associated impacts on your money. It is important to read our point of view with an understanding that capital markets price underlying assets based on anticipated future changes rather than those of the past. As ice hockey star Wayne Gretzky famously said, “I skate to where the puck is going, not where it has been.” Likewise, a portfolio of stocks and bonds is a present value reflection of future expectations. Because there is a general lack of clarity on multiple fronts such as when rapid inflation abates, how high interest rates will go, and how protracted the Russia/Ukraine war and its associated global impacts will last, asset price volatility has become amplified in the absence of confidence to reasonably predict these eventual outcomes. Just this week, market participants are additionally becoming worried that the Federal Reserve’s now commenced tightening cycle (interest rate hikes) could tip the economy into a recession late next year.For our readers desiring a high level general summary rather than detailed perspective, please read the “Quick take” sidebar in each topic section.
The “inflation” narrative is everywhere we turn in the media these days. Simply put, inflation is the rate of increase in prices over a period of time. Importantly, those increased prices equate to a decline in the purchasing power of your dollar over that same period of time. Modest inflation is critical to a healthy capitalistic economy, as it provides the incentive to invest and take risk while increasing short-term demand for products and services. For now, a near perfect storm of multiple circumstances have converged to create a year over year increase of 6.5% in U.S. core consumer prices (as of March 2022 month end), the biggest annual increase since August 1982. When factoring in food and energy costs, the annual U.S. inflation rate is 8.5% – the highest since December 1981.
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