2022 gives us plenty of reason to worry about our finances – inflation, rising interest rates and global conflict are among the top three factors leading stock and bond markets into the most volatile period we’ve ever seen, at least since the initial shock of the pandemic shutdown that disrupted markets in 2020.
However, as we look at each of these legitimate fears, there is some useful context, and even some good news, to put it all in perspective:.
1. Russia’s invasion of Ukraine
Russia’s invasion of Ukraine was brazen, unprovoked and abhorrent. However, the fear in the hearts of Ukrainians seems to manifest itself more as determined courage. Meanwhile, other developed nations seek to wage financial war against the Russian government to punish it for its unwarranted hostility and, most importantly, to stop the fighting.
Promotion
Fears that the conflict could cause economic volatility are justified, not only in Eastern Europe, but around the world, especially as many natural resources in this resource-rich region have stopped flowing. We all felt this when we sent out our social media posts about our record gas prices at the pump. [Insert eye emoji.]
The good news, however, is that the Ukrainians have at least stopped the Russians, who some believe are winning the war outright! While lives are undoubtedly the most worrisome statistic in this conflict, a sober survey of geopolitical events also suggests that they simply won’t have a lasting impact on markets, no matter how painful short-term volatility may be.
In fact, in a study of 22 major geopolitical events since 1962, Vanguard found that the market averaged a 5% total return in the following months and 9% in the following year, very close to the market’s average annual return throughout history. As Greg Davis, Vanguard’s chief investment officer, summed it up, “While uncertainty grips the market and volatility is likely to continue, there will come a time when we will look back at the events of today.”
He’s not wrong. You may need to zoom in on this graphic, but it’s worth it: the
Geopolitics and the Markets
Geopolitical Crisis and Market Vanguard
2. Rising Interest Rates
For more than 20 years, the Federal Reserve has increasingly rewarded borrowers and punished savers through unprecedented interest rate cuts. The result was that those who held bonds throughout the period benefited from capital appreciation – as prevailing interest rates fell, the underlying value of bonds in the secondary market rose.
Ironically, as the bull market in bonds continued (and has continued), those who sought to stabilize their portfolios with conservative fixed income instruments, or simply stockpiled cash for emergencies or short-term items in their savings accounts, earned little to no interest income.
The end result is indeed a tale of good news bad news. The bad news is that borrowers won’t continue to get their money for almost free. The annual home refinancing party is over. If you want to buy a new home, apply for a home equity line of credit, buy a car – whatever you want to call it – you have to pay it off. In fact, in just a few months, rates on 30-year fixed mortgages essentially doubled. Doubled.
The good news, however, is that savers and conservative investors may once again enjoy a bygone era when – wait for it – earning interest was more valuable than adding guacamole to Chipotle’s taco bowl. It may still not be enough to fill your tank, though ……
3. Inflation
That’s because inflation is also on the rise. We pay more. For everything. Compared to the same period last year, we saw a slight decline this past month relative to the March peak many had hoped for, but the drop from 8.5% to 8.3% barely registered on the economy’s Richter scale, especially when expectations were for 8.1 %. (The market did not like that it showed.)
The downside of paying more for everything is obvious. I mean, isn’t inflation the mosquito of the animal kingdom, where everyone is still trying to figure out what good it does? Well, not so fast. On the one hand, wages have gone up. Companies are being forced to pay more to help employees keep up with the rising cost of living, and so is the government. After a 5.9% increase in Social Security retirement benefits in January (the largest since 1982), the next increase is now predicted to be as high as 8.6%!
Of course, all of these raises are affected by the fact that we also pay more for everything – in some cases more than we see in our paychecks – but even after inflation has stabilized, they can’t really pull the raises back up, and all other raises will add higher salaries or benefits. There is another interesting benefit to the inflation that the American middle class is currently experiencing: a significant increase in net worth.
That’s right, because housing has been one of the fastest growing things in recent years – and because the debt people owe on those assets (hopefully) continues to be paid off – the average U.S. balance sheet has also increased, which has also had a positive impact.
