First Quarter 2022: Inflation, Interest Rates and Investing
Friday, April 22nd, 2022

And just like that, two years have passed since spring 2020. Two years since none of us had a clue how long COVID pandemic lockdowns would linger … or how quickly today would arrive. Time can confound us that way, magically managing to crawl and fly at the same time.  

Capital markets are often as confounding, as they convert time + human enterprise into investment returns. Scanning analysts’ recaps on the quarter just past, a dominant theme soon emerges: “confusing,” “eventful,” “uncertain,” “complicated,” “extremely volatile,” and “wild ride,” are just a few of the descriptors found. As one analyst summarized:  

“The market’s focus on Russia’s invasion of Ukraine is being interrupted by the supply-chain effects of COVID lockdowns in Chinese technology hub Shenzhen, imminent tightening by the Federal Reserve as it tries to catch up with inflation, and the risk to the reflation story as consumer sentiment is crushed by rising prices. The result is a confused, and confusing, market.”  

That’s a lot to take in. Which is all the more reason to focus on the lessons time already has taught us about “confused, and confusing” times.  

Take, for example, concerns that the recently inverted yield curve for U.S. treasuries and planned increases in the Fed’s target funds rate may signal that a recession is near. If it happens, that’s not ideal. However, manageable doses of these same events could be an antidote to painfully high inflation, an eventual boon for shorter-duration bond yields, and a catalyst for existing allocations to value stocks.

So far this year Large Cap Value stocks have performed much better than Large Cap Growth stocks. In hindsight some of the predictions we made during our most recent Annual Virtual Client Event & Economic Update have turned out to be true. But there’s no way we could have known this for certain ahead of time.

This makes it tricky for investors and markets alike (which, after all, are merely a construct of our own devise) to sort out what even qualifies as “good” and “bad” news from one moment to the next. This likely translates into the volatile market pricing we’ve seen of late.  

Fortunately for disciplined investors like us, it’s unnecessary to get swept up by erratic signals, or tricked into assuming a false sense of urgency. Today more than ever, we believe it makes the most sense to keep our eyes and your investments focused on the horizon of your goals. Align your investment plan with your financial plan.

As we described in our recent series on Interest Rates, Inflation, and Investment Strategy, this means continuing to deploy the same core principles we use across time and through various market conditions. If your investment portfolio is already well-structured for your needs, you should already be positioned as effectively as possible in the face of future unknowns.

More pointedly to current events, your portfolio should already be appropriately allocated among the push-and-pull concerns related to potential inflation, rising interest rates, recessions, and similar risk/reward tradeoffs. This includes: 

  • Hedging against inflation: Protecting your upcoming cash flow needs against inflation by incorporating an element of inflation-indexed assets 
  • Outperforming inflation: Remaining invested in assets that are expected to outperform inflation over time 

Again, even a best-laid plan doesn’t guarantee success. But it serves as the most logical course toward your end goals. While in the short term we may be seeing lower account values on our monthly statements, just remember, there was a time before this which precluded markets reaching all time highs. And it will happen again, but nobody knows exactly when.

Bottom line; maintain long-term thinking, do not try to time the market, revisit your financial plan, and always remember we are here to help.