- The early concerns of 2022 were concentrated on the anticipation of interest rate hikes and how this monetary policy shift would impact economic growth.
- The conflagration in Ukraine is expected to further amplify inflationary pressures which creates additional uncertainty around interest rate policy going forward. The initial market response has resulted in paring back interest rate expectations.
- Correctly anticipating increased volatility and elevated downside risk, in early December we reduced our equity exposure from overweight to neutral and increased the quality of our bond portfolio while maintaining a strategic underweight position in bonds.
- Despite the potential headline risks which are pronounced, a strong macroeconomic backdrop in the U.S. economy gives cause for cautious optimism.
The year 2022 began with financial market volatility we haven’t experienced since COVID burst onto our consciousness in early 2020. The uncertainties that inspired this volatility primarily surrounded the pace of our U.S. Federal Reserve bank unwinding their outsized fiscal and monetary policy response to the pandemic. Those uncertainties remain and have now converged with the conflagration in Ukraine. Our thoughts and prayers are with the Ukrainians and the entire region.
In recent weeks it has been conventional wisdom that Russia would seize parts of Ukraine or possibly the entire country while the developed world mostly observed. Events have not unfolded as many expected. The Ukrainians are presenting more of a challenge to Putin’s military than expected. In addition, more substantial sanctions on Russia and extensive financial and military resource support from countries throughout the world are offering a glimmer of hope the war ends early without Russia and Putin accomplishing their goals.
We are still in the early phase of this historic drama and uncertainty abounds on many fronts. However, we do believe the Ukraine/Russia crisis is likely to temper the pace of the Federal Reserve’s upcoming increase in interest rates.
Pacific Wealth Management's portfolios are constructed to weather the present market volatility. Our recent proactive changes in the fall of 2021 to both the stock and bond components of our portfolios anticipated these elevated levels of volatility. In early December we reduced our stock market exposure from an ‘Overweight’ position to a ‘Neutral weight’ and increased the quality of our bond portfolio while maintaining an overall underweight exposure to bonds as inflation pressures persist. Our asset management discipline remains data-dependent and driven by both economic and financial market metrics:
- Our U.S. economy is projected for real growth of 3.5-4% in 2022
- The strong labor market should continue to support consumer spending
- Credit conditions remain very strong
- Durable goods orders rose more than expected in January, a positive sign for Cap-Ex demand
- Profit margins remain at record highs
While the world is experiencing quite a lot of disruption, the fundamental data behind the US economy remains supportive. Please feel free to let us know if you have questions or concerns regarding any of recent current events.
We are looking forward to speaking with you soon.