- Western sanctions are pressuring the global economy.
- Stagflation is a distinct possibility for the domestic economy.
- Diversification remains an important strategy in times like these.
Nearly two weeks ago, Russia invaded Ukraine. We continue to believe Western governments are unlikely to escalate this war by directly engaging Russian military forces. Instead, their primary tool has been economic sanctions. While there is clear evidence that the sanctions have impacted the Russian economy, they have also exacerbated global economic headwinds. With the U.S. and the United Kingdom just announcing a ban on Russian oil imports, price pressures will continue longer, and overall inflation will become more entrenched in the global economy, potentially slowing overall growth. Though risks are increasing, now is not the time to alter your portfolio risk above or below your long-term investment objective.
Western sanctions on Russia have affected its economy with the value of the ruble plummeting to a record low and the Russian Central Bank forced to double its key interest rate to 20%. However, with sanctions limiting the purchases of Russian exports and because Russia is a significant exporter of commodities such as metals, agricultural products, and chemicals, global prices have spiked for these commodities. While Russian energy was not officially targeted until the U.S. and the United Kingdom announced the official ban today, financial sanctions had made it difficult to buy Russian energy exports. The result has been significant price surges in commodities usually supplied by Russia into the global economy including wheat, nickel, oil and natural gas. For example, here in the U.S., oil has doubled since its December low and gasoline prices have reached a new record high of $4.17/gallon.
These sanctions, especially the new Russian energy ban, will continue to drive inflation pressures higher. While the possibility exists that more fossil fuels can be acquired from Saudi Arabia, Venezuela and Iran or that the U.S. can increase domestic oil production (we are still producing about 1.5 million barrels of oil less per day than before the pandemic), this will take some time to reach the economy. Since energy is about 7% of the consumer price index, expect inflation to be elevated much longer than anticipated prior to the Russian invasion. Furthermore, given the impact of higher prices on a domestic economy that was already flashing slowing economic growth signals such as a flattening yield curve, falling consumer confidence, and declining real wages, stagflation is a distinct possibility. Stagflation occurs when an economy is experiencing a simultaneous increase in inflation and slower economic output. Optimistically, we do not expect a recession now. Despite the jump in prices, the consumer is in great shape financially, spending data continues to show strength, and the labor market is very robust.
Despite our optimistic tone, the rise in prices due to the Russian invasion and ensuing sanctions raise uncertainty around our economy and domestic monetary policy. The Federal Reserve (Fed) is in a tough
predicament. If they raise rates too quickly to combat inflation, they risk slowing the economy too much. If they raise rates too slowly, they risk rising inflation materially affecting consumer spending. As these risks and the fallout from the Russian invasion continue to evolve, we expect the Fed to err on the side of caution and take a more measured approach than the markets anticipate. Three weeks ago, there was a 95% chance the Fed would raise interest rates by 0.50% at its meeting next week. Today, it is widely expected (96% chance) that they raise rates by 0.25%.
With market uncertainty rising every day, we continue to anticipate more volatility for the foreseeable future. Each day brings breaking news around the Russian invasion of Ukraine and the global economic fallout. While risks ebb and flow as events evolve, expect financial markets to react accordingly. Today’s events have not been similarly experienced in 80 years so there is much uncertainty. However, one certainty remains – maintaining a long-term perspective with an investment portfolio that is consistent to your goals is vital. Now is not the time to dramatically increase or decrease risk.
We maintain that diversification is the key in this market. In these times, as your financial advisor, we can help you stay focused on your long-term risk and return goals and help you with your personalized investment objectives.
Please call us at 817-462-4200 today to schedule an appointment or account review.
This report is created by Cetera Investment Management LLC.
About Cetera® Investment Management
Cetera Investment Management LLC is an SEC registered investment adviser owned by Cetera Financial Group®. Cetera Investment Management provides market perspectives, portfolio guidance, model management, and other investment advice to its affiliated broker-dealers, dually registered broker-dealers and registered investment advisers.
About Cetera Financial Group
“Cetera Financial Group” refers to the network of independent retail firms encompassing, among others, Cetera Advisors LLC, Cetera Advisor Networks LLC, Cetera Investment Services LLC (marketed as Cetera Financial Institutions or Cetera Investors), Cetera Financial Specialists LLC, and First Allied Securities, Inc. All firms are members FINRA / SIPC. Located at 655 W. Broadway, 11th Floor, San Diego, CA 92101.
Individuals affiliated with Cetera firms are either Registered Representatives who offer only brokerage services and receive transaction-based compensation (commissions), Investment Adviser Representatives who offer only investment advisory services and receive fees based on assets, or both Registered Representatives and Investment Adviser Representatives, who can offer both types of services. The material contained in this document was authored by and is the property of Cetera Investment Management LLC. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by affiliated and non-affiliated registered investment advisers. Your registered representative or investment adviser representative is not registered with Cetera Investment Management and did not take part in the creation of this material. He or she may not be able to offer Cetera Investment Management portfolio management services. Nothing in this presentation should be construed as offering or disseminating specific investment, tax, or legal advice to any individual without the benefit of direct and specific consultation with an investment adviser representative authorized to offer Cetera Investment Management services. Information contained herein shall not constitute an offer or a solicitation of any services. Past performance is not a guarantee of future results. For more information about Cetera Investment Management, please reference the Cetera Investment Management LLC Form ADV disclosure brochure and the disclosure brochure for the registered investment adviser your adviser is registered with. Please consult with your adviser for his or her specific firm registrations and programs available. No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The opinions expressed are as of the date published and may change without notice. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision. All economic and performance information is historical and not indicative of future results. The market indices discussed are not actively managed. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.
A diversified portfolio does not assure a profit or protect against loss in a declining market.