We have plenty to worry about in 2022. Inflation, rising interest rates, and a global conflict are three big reasons why stock and bond markets have been in one of the most volatile periods since 2020 when the pandemic shut down markets.
We can see that each of these legitimate concerns has some context.
1. The Russian Invasion in Ukraine
The Russian invasion invading Ukraine is unprovoked, brazen, and unacceptable. In Ukraine’s hearts, the fear intended to strike seems to have been more than the resolute courage. The rest of the developed world is waging an economic war against the Russian state to punish its unjustifiable hostility and stop the fighting.
Fears that the conflict might cause economic ripples are justified not only in Eastern Europe but around the globe, as well, given that many of the region’s natural resources have stopped flowing. We all feel that way as we post on social media about our record-setting gas prices.
However, the good news is that the Ukrainians have managed to stop the Russians, and some claim that they are winning the war. While the loss of lives is the most worrying statistic, a careful analysis of geopolitical events suggests that they don’t have any lasting impact on markets, no matter how painful the volatility may be.
Vanguard’s analysis of 22 major geopolitical events dating back to 1962 found that the market returned 5% in the subsequent months and 9% the following year. This is very close to the historical average market return. Greg Davis, Vanguard’s Chief Investment Officer, stated that “despite the uncertainty that has gripped markets and the likelihood of continued volatility, we may one-day view today’s events retrospectively.”
2. Rising Interest Rates
The Fed has been rewarding borrowers with unprecedented interest rate-dropping campaigns for more than 20 years. The result was that holders of bonds during that period benefited from capital appreciation –as the prevailing interest rates fell, the underlying value for bonds rose on secondary markets.
Ironically, as the bond bull market continued (and persisted and persists), those who sought to stabilize their portfolios using conservative fixed income instruments or store cash for emergencies or short-term projects in savings accounts have almost no interest income.
This is a mixed bag of good news andbad newss. Bad news: Borrowers won’t be able to continue receiving money at almost no cost. The annual home refinances party has ended. You can take out a home equity credit line to purchase a house or a car, but you will have to make the payments. Interest rates for a 30-year fixed mortgage have almost doubled in months. Doubled.
However, the good news is that conservative investors and savers may be able to enjoy the past era of earning interest that is more valuable than adding guac sauce to your Chipotle burrito bowl. However, it may not be enough to fill your gas tank.
This is because inflation has been rising. We are paying more. Everything is more expensive. We saw a slight decrease in the month-to-year ratio to March’s peak, but it barely registered on the economic Richter scale. The expectation was 8.1%. (The markets were not likey and it showed.
Paying more for everything has its downside. Is inflation not just the insect of the animal kingdom where everyone is still trying to figure it out? But not so fast. One, wages have gone up. Employers are forced to pay more to keep up with rising living costs. The government also has to pay more. The current projection of the subsequent increase is 8.6% after a 5.9% increase for Social Security retirement benefits in Jan, which was the largest since 1982.
All this inflation is tempered by the fact we are paying more for everything, in some cases even more than what we see in our paychecks. However, once inflation slows down, they won’t be able to reduce the increases. And all the other raises will only compound a higher salary or benefit. The U.S. middle class is experiencing an exciting benefit from inflation: a significant increase in their net worth.
This is right since houses have seen the most growth in recent years. The debt on these assets has (hopefully), continued to be paid down. As a result, the average American’s balance sheet has increased, which has had a positive effect on the vast wealth gap in America.
Are you imagining me selling you rose-colored glasses, and promising you that everything will be okay? There’s nothing to be concerned about. Nope. The majority of the time, the negatives outweigh the positive. It isn’t all negative news. Perhaps more importantly, the extremes that we have seen are only that. They are not expected. So don’t panic.
These fears share one thing in common: they are outside our control. Unless you have stock in the 24/7 TV news cycle fear factory, this is true. While I don’t suggest that you avoid action, considering all the maladies in the world, you can save your time and effort on those things you have control of.