Both equity and bond markets suffered in February over expectations of rate hikes and the growing Russia threat at Ukraine’s borders. Indeed, after weeks of troop movements and denials, Russia invaded Ukraine towards the end of the month, sending investors to safety and bringing new volatility to markets.

The S&P 500 ended the month down 3.1%, and U.S. Treasuries declined 0.7% as the market priced in six rate hikes for 2022.

Adding Fuel to Commodity Prices

Energy was a primary driver of inflation in 2021, as gasoline costs surged 50% and fuel oil costs jumped 41%, a situation you may have been noticing at the gas pump. Prices have continued to rise this year, and the situation with Russia adds a new challenge. Russia is the world’s second-largest oil producer and the top natural gas producer. The day Russia launched its land, sea, and air invasion on Ukraine, oil exceeded $100 a barrel for the first time since 2014.

Russia is home to roughly $75 trillion worth of natural resources, and as a result of the conflict, several metals have touched multi-year highs, including copper, aluminum, and palladium. For example, Russia is the world’s leading exporter of palladium, a critical metal for automotive exhaust systems and mobile phones.

Food exports could be impacted as well, with Russia and Ukraine accounting for nearly a quarter of global wheat exports. Ukraine happens to be Europe’s breadbasket, with 71% highly fertile agricultural land. Significant exports like barley, corn, and vegetable oils have notably skyrocketed in price.


The Fed’s Tricky Balancing Act

In the midst of this (hopefully temporary) shock, we have the overall context of rising inflation. January’s Consumer Price Index, a measure of the change in cost of a basket of goods and services, rose 7.5% year-over-year.

The Russia invasion now threatens to keep inflation running hotter. As a result, the Fed has to tackle the tricky balancing act of fighting inflation by raising rates while still promoting financial stability in the face of these new geopolitical tensions. Markets will be keeping a close eye on the March meeting of the Federal Open Market Committee, which is expected to kick off the first round of interest rate hikes.

Mortgage rates continue to rise

Another important point of context for Fed decision-making is property. Real estate values have continued to soar, spurred on by low rates and a shortage of inventory. Average home values in 481 cities are now over $1 million, more than double the number of cities reaching that level since 2016.

With the Fed signaling an acceleration of rate hikes, interest rate markets have adjusted, fueling a rise in US mortgage rates. The 30-year fixed mortgage rate touched 4.08% last week.  While we are still hovering around historic lows, mortgage rates are starting an upward trend. This could help cool the rising cost of housing in terms of prices, but again, how this plays out could be impacted by the context of policy and what is going on in Europe. This is another important area for investors to keep an eye on.

The Bottom Line

Investors are currently flip-flopping between equities and safe havens, prompted mainly by geopolitical changes and uncertainty about the Fed’s moves. Even if we haven’t hit the bottom yet, in times of crisis it’s important to maintain a measured approach and manage risk carefully.  Keep in mind we are coming into the year with a solid economic backdrop. Despite headwinds, corporate earnings remain strong and retail sales have grown.

That said, going forward, eyes are on the Russian-Ukraine conflict, any spillover inflationary effects, and the Fed’s plans for interest rate hikes and monetary tightening. Next month the Fed will likely start hiking rates to begin the path to rate normalization. We expect to see some knee-jerk reactions from markets as they digest these ongoing developments.

This communication is distributed for informational and educational purposes only and is not an offer to sell or a solicitation of an offer to buy any security. The information herein has been derived from sources believed to be accurate, but no guarantee can be made as to its accuracy or completeness. All investments include the risk of loss and nothing herein should be construed as a guarantee of any specific outcome or profit. Past performance is no guarantee of future results. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly.

All economic and performance data is historical and not indicative of future results. All opinions expressed herein are those of WealthSource® Partners, LLC and do not necessarily represent the opinions or views of WealthSource’s affiliates, are current only as of the date of this communication and are subject to change without notice. WealthSource does not have any obligation to provide revised opinions in the event of changed circumstances.

The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The Nasdaq Composite is a market-capitalization- weighted index consisting of all Nasdaq Stock Exchange listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds or debenture securities. The Bloomberg Barclays U.S. Aggregate Bond Index measures the investment-grade U.S. dollar-denominated, fixed-rate taxable bond market and includes Treasury securities, government-related securities, corporate securities, residential and commercial mortgage-backed securities, and asset-backed securities.

The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally considered representative of the broad U.S. stock market. The MSCI All Country World Index (ACWI) is designed to represent the performance of large- and mid-cap stocks across 23 developed and 26 emerging markets and represents approximately 85% of the free float-adjusted market capitalization of each market. The MSCI Europe Index captures large- and mid-cap representation across 15 developed market countries in Europe and covers approximately 85% of the free float-adjusted market capitalization across the European developed market equity universe. The MSCI Emerging Markets Index captures large- and mid-cap representation across 26 emerging market countries and covers approximately 85% of the free float-adjusted market capitalization in each country.

Chris Shea

Chief Investment Officer

As Chief Investment Officer, Chris finds and vets state-of-the-art investment choices for WealthSource clients — and explains important but complex investment concepts.

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