Managing Your Financial Portfolio During Economic Uncertainty
Amy Brand, Parkside Financial Bank & Trust
In the last several weeks, domestic and global economic situations have evolved rapidly. There are several different forces at play, such as higher interest rates and high inflation, but the Russian invasion of Ukraine continues to remain at the forefront. This conflict has left financial markets in a place of uncertainty, and we want to prepare and advise you on how to make wise market choices in the midst of it all. We have observed successful strategies in previous volatile markets that can help you now. There are several short-term and long-term impacts of the Russian invasion on U.S. markets and global markets.
Short-Term Market Impacts
In the short-term, we anticipate continued volatility. As we have seen recently, swings of +2% or -2% in a given day are common occurrences in these periods driven so much by news flow and the short-term view of the markets.
We anticipate that prices will continue to increase globally, exacerbating supply-driven inflation. Russia is the world’s 11th largest economy but its second largest commodity producer. It is the United States’ 26th largest trading partner and prior to the recent ban on oil imports, less than 5% of our oil supply was coming from Russia. Despite the limited direct exposure to Russian exports in the U.S., the increase in prices of energy, food, and metals will cause inflation throughout the world economy, which will increase prices domestically as well.
Russian stocks, bonds, and the ruble have all fallen sharply with the sanctions that have been applied. Russia is a developing country that comprised less than 5% of the MSCI Emerging Markets Index at the beginning of 2022. Direct Russian exposure is very limited for Parkside’s client portfolios. For the International and E.M. funds that do have exposure, it was 6% or less at the start of 2022.
As of March 10th, Russia was removed from all broad MSCI indexes, and funds that own Russian positions have marked positions down to zero. This write-down of Russian assets has caused ripple effects through the rest of the emerging and developed markets. In the short-term, we feel this situation will provide an opportunity for active international managers to add positions to their portfolios at steep discounts.
Long-Term Market Outlook
In the long-term, we want to keep a careful eye on overseas equities, looking for the catalysts that will lead to outperformance. At the end of 2021, the lower relative valuations of international markets and their continued recovery from COVID lead us to have a favorable outlook on those markets. The war in Ukraine has delayed that time to recovery, but we still have a favorable long-term outlook on international and emerging markets.
As the Federal Reserve raises interest rates, we anticipate lower than normal allocation to core fixed income in the short-term and a weakening of the U.S. dollar in the long-term. The initial invasion of Ukraine increased the prices of bonds and brought the expectations for rate increases down. However, in the last two weeks, the market has shifted back to pricing in six rate hikes from now until the end of the year. That indicates to us that fighting inflation is economically a higher priority than providing stimulus to the markets via lower rates.
Now is not the time to make dramatic moves in the portfolio's strategic asset allocation.
We build portfolios for the long-term (10+ years). The themes we identify in building portfolios will continue to play out and be relevant. We recommend a change in strategic asset allocation in situations such as retirement and various lifestyle changes, tax modifications, and changes in time horizon.
Remember your long-term investing horizon. Looking back over the last 12 geopolitical, volatile macro-events that have occurred, going back to the Israeli Arab War/Oil Embargo in 1973, the average duration of the sell-off in the market lasted 12 days, with the average equity market sell-off being around 6.5%, and the recovery taking about 137 days.
If you plan on reallocating your assets, keep in mind that three main things are affecting the market today. They all impact portfolios in different ways — the Russian invasion of Ukraine, high inflation, and a tightening monetary policy from the Federal government. In the last couple of weeks, the focus has rightfully been on the conflict in Ukraine, but we have to remain mindful of high inflation and rate increases as well.
It is nearly impossible to predict how each of these factors will affect your investments at any given time. There will always be something to think about, but these periods of heightened concern are also typically times of opportunity.
As your trusted financial institution, your Parkside team is here to help. It can feel overwhelming when considering what decisions to make within your financial portfolio in these volatile times. Please do not hesitate to contact your advisor with any questions.
Trust & Family Office Advisor
Parkside Financial Bank & Trust is not a tax advisor. All decisions regarding the tax implications of your investments should be made in consultation with your independent tax advisor. We will work with you independent tax and/or legal advisor(s) to help create a plan tailored to your specific needs. The material contained herein is for informational purposes only and does not constitute tax advice.