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Inflation, Interest Rates, Corrections and Ukraine. Oh My!

Jan Blakeley Holman, CFP, CIMA, ChFC, CDFA, CFS, GFS
Director of Advisor Education
18 Mar 2022
4 min read

As investors face multiple threats like inflation, increasing interest rates, volatile markets and the reality of the Ukrainian invasion, they are embarking on their own “hero’s journey.”

The hero’s journey is a tale as old as time. It begins with an unprepared and often fearful hero who has set her sights on achieving some great goal. To achieve the goal, our hero must set out on an adventure. Unbeknownst to her, along said way, she will come upon challenges and obstacles meant to set her off course and prevent her from achieving the goal.

The Wizard of Oz is a classic example of a hero’s journey. It’s a story we all know well. When Dorothy’s house abruptly landed in Munchkin Land and killed the Wicked Witch of the East, she met Glinda the Good Witch of the North. Glinda advised Dorothy that for her to achieve her goal of finding her way back to Kansas, she would have to see the Wizard of Oz. But, and here’s the challenge, to get to the Wizard, she and Toto would have to set out on an adventure down the yellow brick road which will take them to the Wizard’s home in the Emerald City. Dorothy and Toto were sent off on their journey with great fanfare and optimism, but that optimism would soon fade.

Along the way, the travelers came upon the Scarecrow and the Tin Man, both of whom had some goals Dorothy believed the Wizard could help them achieve. Together they continued down the yellow brick road. Once the foursome reached the haunted forest, the pathway was no longer beautiful and bathed in sunshine. Instead, they found themselves in a dark and foreboding place with angry trees, a cowardly lion and the Wicked Witch of the East who threw fireballs at the Scarecrow. In an instant, all their hope and optimism turned into uncertainty and fear. As the journey became increasingly more difficult, they each began to question the reasons they’d embarked on the trip in the first place.

Today’s Investment Environment

Like Dorothy and her friends, you may feel as though you’ve entered a dark and unwelcoming financial forest filled with unknowns and dangers at every turn. Inflation, increasing interest rates, market volatility and the looming effects of the war in Ukraine may seem as though they are too much to endure. Let’s look at each of these threats individually and see if they’re as foreboding as they appear.

Inflation

Inflation is a supply and demand phenomenon that’s typically explained with the phrase, “inflation is the result of too many dollars chasing too few goods.” It’s difficult to remember a time when inflation was as concrete to all Americans. Sure, the price of cars has risen dramatically over the past 20 years, but the increase in the prices of used cars and many other items has happened right before our eyes. Think the toilet paper shortage of 2020.

Every time you hear a store employee say, “We don’t have any in stock. It’s a supply chain issue,” you can bet the price of that item to increase once it’s in stock again. In 2021 the consumer price index increased by 7%, the highest annual increase since 1982. In January 2022, prices rose 7.5%. And now to put icing on the cake, gas prices have spiked in response to the Russian invasion of Ukraine.

Interest Rates

For decades, the Federal Reserve has used interest rates as a tool to increase growth and tamp down inflation. It’s worked in the past, so why not now? According to pundits, to fight inflation, the Fed is expected to increase rates as many as 6 times this year. Their goal is make individual and business borrowing more expensive as a way to discourage buying which will reduce demand and allow prices to stop increasing.

Market Volatility

Just as the Wizard of Oz warned the visitors to “pay no attention to the man behind the curtain,” right now investors would be wise to heed that advice. The week of February 21, 2022, the U.S. stock market, as measured by the S&P 500, swung as much as 6.57% from its low to its high. And don’t forget, that was a short week because the markets were closed on February 21 in celebration of Presidents Day.

Volatility is not new to investors. Since the beginning of the COVID-19 crisis, the markets have dished out some significant, albeit short-lived, volatility.  From its March 2020 low of 2,237.20, the S&P 500 Index gained almost 68% to close at 3756.07 on December 31, 2020. A year later, on December 31, 2021, the S&P 500 closed at 4766.18, almost 27% higher than its close at the end of 2020. While the market volatility is always a reality, in this case we know that investors who moved money out of equities at beginning of the COVID-19 lockdown in 2020 may not have reaped the rewards of remaining invested during the market rebound that carried equities significantly higher until the end of 2021.

Russian Invasion of Ukraine

Finally, there’s the Russian invasion of Ukraine. It’s said that investors abhor uncertainty and when faced with uncertainty, like the invasion of Ukraine, the react by seeking safe investments. While we don’t know what lies ahead, we do know that when uncertainty presents itself, successful investors focus on their long-term goals rather than making short-term, emotional decisions. This is not the time to move out of equity investments.

While none of these challenges should be surprising, they can be overwhelming when they all happen at once. As is the case in every hero’s journey, the hero-to-be is bound to encounter highs, lows and everything in between. Just like the journey back to Kansas that Dorothy and Toto embarked upon, achieving your financial goals is simple, but it’s never easy. Don’t get distracted by the noise. Stay the course!

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