Should an Inverted Yield Curve Concern Investors?

Chris Kamykowski, CFA, CFP® | Head of Investment Strategy and Research
Rich McDonald, MBA | Head of Fixed Income and Portfolio Management

The first quarter of 2022 provided plenty of fodder for the markets to contend with, from historically high inflation levels and the reversal of the Federal Reserve’s (Fed) accommodative monetary policy to the disruption of world order via the Russian invasion of Ukraine. Now another element has made its way onto the radar of investors: the dreaded yield curve inversion. In this quick post, we will provide color on what an inversion is, why there is concern, and how to properly assess the risk that markets believe an inversion is forecasting.

What is a yield curve inversion?

When looking at the US Treasury yield curve, maturities range from one month to 30 years, with yields typically rising as one goes further out on the curve; this is characterized as upward sloping and is the most common shape. Longer yields are impacted more by inflation expectations, demand/supply, and uncertainty of time, which require a higher yield to compensate investors. Shorter-term yields are driven largely by the Fed’s monetary policy.

The upward sloping nature also can be described in degrees of steepness by taking the difference between one point of the curve versus another (e.g. the difference between the 10-year yield and the 2-year yield). Over the economic cycle, it is common for the slope of the yield curve to shift as conditions change. Typically, this “spread” is distinctly positive, but the curve can become flatter as the difference narrows. Less frequent is when the curve inverts when the shorter-term yield exceeds that of the longer-term yield. This is exactly what markets are focused on today.

What causes the yield curve to invert?

The primary catalyst to a yield curve inversion is the Fed’s change in monetary policy from loosening rates (lowering the Fed Funds rate) to tightening (raising the Fed Funds rate), which is primarily felt on the short end of the curve. This typically occurs when the Fed believes the economy requires less monetary stimulus given overall growth is healthy and expanding while unemployment is low. Additionally, the Fed’s dual mandate encompasses maximizing employment and minimizing the impact of rising inflation (especially, investors’ expectations of future inflation). With a tight labor market, the Fed’s rate hikes are focused on taming inflation.

How often have inversions happened with the US yield curve?

The most often-cited part of the curve that markets watch is the spread between the 10-year and 2-year Treasury bonds (“2-10 spread”). Since 1978, this part of the curve has inverted six times prior to the last six recessions; typically, each recession occurred within 6-36 months of the inversion. This historical pattern has led to concern in markets recently given the narrowing of the 2-10 spread, which saw an intra-day inversion on Tuesday, March 29, 2022.

*For the above chart: See important disclosures at the end of this article.

How have markets performed after a yield curve inversion?

Even as markets fret about yield curve inversions, the months following curve inversions typically see positive performance.

Source: Morningstar; time periods represent inversions from 1978 – 2022. Given varying inception dates of the indices, not all indices had performance during each inversion over the period selected.

Considerations to be aware of regarding yield curve inversions

At minimum, there are several caveats to be aware of with this specific data before making wholesale changes to your portfolio:

• First, while the 2-10 spread is one the market will focus the most on, recent Federal Reserve research has questioned the importance of this particular spread versus other parts of the curve¹. They noted statistical evidence that the 2-10’s predictive power is not what it seems or “spurious” at best. Another yield curve slope the Fed favors to track is the difference in the 10-year Treasury and the 3-month T-Bill. This currently shows a positive slope of approximately 180 bps and far from an inversion.
• Second, the New York Fed has built a model utilizing the 10-year/3-month spread to calculate the probability of a recession 12 months ahead. Its most recent reading shows that probability at 6%².
• Third, it is best to think of the inversion as a signal of late-cycle economic conditions more so than a forecaster of a pending recession. As noted previously, the time between a previous inversion and a recession is upwards of 36 months. This is significant if one takes a bearish position today, waiting for the recession to come all while the markets continue to outperform. In addition, it’s fair to question if a brief inversion is the same as a prolonged inversion in the curve.
• Finally, other factors have been at play in the past when a recession followed an inversion., Did the 2-10’s spread predict other economic or market events that pushed an economy into a recession? The most recent example of this is the late-summer 2019 curve inversion, which was then followed by the COVID-induced economic shutdown and steep recession. It’s hard to believe anyone saw that particular recession coming.

Conclusion

With inflation running at some of the highest levels since the early 1980’s, the Fed has signaled their intention to raise rates aggressively to tame inflation. With short-term rates up sharply, the curve has become very flat and created concern over the signal that inversions seem to represent. However, as noted previously, not all inversions are created equal. While recessions have occurred after previous inversions, there can be many months of market outperformance before the start of contraction in the economy.

What should an investor do? First, the ”upside” of rising rates is potential tax-loss harvesting in your fixed income portfolio given the sharp increase in yields and subsequent fall in prices. Second, and more importantly, remain committed to a long-term, strategic approach following an investment plan designed with your goals and risk tolerance in mind. Maintain a portfolio that is properly diversified to weather volatility and uncertainty the market will undoubtedly experience throughout each year. This strategic approach is aimed at preventing short-term allocation shifts over near-term events, which can create an unnecessary drag on long-term investment results. 

Definitions:

The S&P 500 Index is a free-float capitalization-weighted index of the prices of 500 large-cap common stocks actively traded in the United States.

The NASDAQ Composite Index is a market capitalization weighted index with more than 3000 common equities listed on the NASDAQ Stock Market.

The MSCI EAFE Index is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies.

The Bloomberg U.S. Treasury Bond Index includes public obligations of the US Treasury, ie US government bonds. Certain Treasury bills are excluded by a maturity constraint. In addition, certain special issues, such as state and local government series bonds (SLGs), as well as U.S. Treasury TIPS, are excluded.

The Bloomberg U.S. Aggregate Bond Index is an index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities and mortgage-backed securities.

The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on the indices’ EM country definition, are excluded.

The FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.

Sources: 

1 Engstrom, Eric C., and Steven A. Sharpe (2022). “(Don’t Fear) The Yield Curve, Reprise,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, March 25, 2022, https://doi.org/10.17016/2380-7172.3099.

2 Federal Reserve Bank of New York, The Yield Curve as a Leading Indicator, https://www.newyorkfed.org/research/capital_markets/ycfaq.html

© 2022 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified; trademarks and copyrights of materials referenced herein are the property of their respective owners.  Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change.  This is not an offer to sell or buy securities, nor does it represent any specific recommendation.  You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. You cannot invest directly in an index. Past performance is not indicative of future returns. All investments are subject to a risk of loss.  Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise

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Ask the CFP: What is Tax Loss Harvesting?

 

Hello everyone and welcome to this month’s Ask the CFP segment. This month’s question is, “What is tax loss harvesting?” Tax loss harvesting, which I’m going to call TLH at the risk of being tongue-tied throughout this video, is a special tax strategy whereby investments are intentionally sold at a loss for tax reasons. This type of strategy can be impactful especially during market downturns or periods of market volatility. So why would someone want to intentionally realize a loss on an investment when financial planners generally recommend holding investments long-term?

Let’s assume you own two stocks in a taxable investment account, such as a brokerage account. TLH doesn’t apply for retirement accounts such as IRAs or 401(k)s. Let’s also assume you invested $50,000 into each of these stocks or a total of $100,000. If one of your stocks does well and grows to $70,000, but your other stock does poorly and declines to $40,000, your portfolio is now worth $10,000 more at $110,000.

Now let’s assume you want to sell some of your gains in the larger stock to manage risk in your portfolio. Selling this stock at a gain means you will owe taxes on the gain. However, if you sell shares of your other stock, which is at a loss, the IRS generally allows you to offset investment gains with investment losses. Therefore, you may be able to harvest losses to offset gains and potentially avoid paying taxes on the gains. Keep in mind, not all investment losses can offset investment gains. To keep this simple, we’ll assume each stock has been held for over one year for a long-term capital gain or loss.

In the market drop of 2020 due to COVID, many people found their portfolios in decline. For those that had taxable non-qualified investment accounts with investments at a loss, it provided an opportunity to intentionally sell those investments to realize a tax loss to offset taxable gains in that tax year or future years. While selling at a loss may sound like selling while the market is down, keep in mind that TLH usually involves immediately buying a similar investment to remain invested. A simple example would be selling Pepsi at a loss and immediately buying Coke. You would still own a large, US beverage brand while taking advantage of a TLH opportunity.

One important rule to keep in mind with TLH is avoiding something called a wash sale. A wash sale disqualifies someone from being able to realize and deduct a tax loss when buying a substantially identical investment 30 days before or after the loss sale. In other words, the IRS rule is meant to avoid misuse of TLH by realizing a tax loss and then immediately buying the same investment back again. TLH may sound a bit complex and does require work, but when used properly, it can be a powerful tax strategy.

If you have a question about this topic or have a question for next month’s video, please send it to DTroyer@MonetaGroup.com. Thanks for watching and we’ll see you next month.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation.

©2022, Moneta Group Investment Advisors, LLC. Trademarks and copyrights of materials referenced herein are the property of their respective owners. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed investment professional before making any investment decision.

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Preparing to File Your Taxes

By Brighton Samet, Moneta Tax Planning Consultant

This is the time of year that you should be receiving copies of all your necessary tax documents. Besides the normal W-2s and 1099s, this year many taxpayers will also receive Letter 6475 (about the third round of Economic Impact Payments) and Letter 6419 (about the Advance Child Tax Credit Reconciliation) from the Internal Revenue Service (IRS).

Here is more information about how to use these letters and other information you should know for the upcoming tax filing season.

Economic Impact Payments (EIP)/Recovery Rebate Credit

Beginning in March 2021, most eligible taxpayers automatically received the third round of Economic Impact Payments. The maximum payment was $1,400 per taxpayer and qualifying dependent. If your prior year adjusted gross income (AGI) was above $75,000 for single taxpayers or $150,000 for married filing jointly (MFJ), you may have received a reduced amount.

As more tax returns were processed throughout 2021, the IRS may have also sent additional “plus-up” payments if you qualified for a higher payment with updated information. Letter 6475, which will continue to be sent out through March 2022, should list the total paid for 2021.

If you had a child born in 2021, added a dependent, had lower income in 2021 or otherwise did not receive your full amount of the EIP, you may be eligible to claim the 2021 Recovery Rebate Credit on your Form 1040. If you already received the full amount you were eligible for, you do not have to report anything on your 2021 tax return. If your payment based on your 2019 or 2020 tax return information is higher than what you are eligible for based on your 2021 tax return information, you also do not need to pay back any part of the payment you received.

Child Tax Credit (CTC)

From July to December 2021, the IRS sent advance child tax credit payments to taxpayers of up to 50% of the expected CTC. Letter 6419 has the total amount paid in 2021 (married couples receiving the payments will each receive a letter with their amount).

For 2021, the CTC was increased to $3,600 (for children age 5 and under) and $3,000 (for those age 6 through 17). There are two different income phase-outs for the CTC based on modified adjusted gross income (MAGI). The enhanced portion begins to phase out once MAGI exceeds $150,000 if MFJ, $112,500 for head of household (HOH), or $75,000 for single and separate returns. The regular portion ($2,000) of the CTC will begin to phase out once MAGI exceeds $400,000 if MFJ or $200,000 for all others.

Unlike the EIP payments, you may have to repay some or all of the advanced child tax credit payments received if you were paid more than you were entitled to based on your final 2021 tax return. This could happen if you claim fewer dependents or have higher income in 2021 compared to your 2019 or 2020 information. You are required to reconcile the advance payments received to the amount allowed as a credit on the 2021 Form 1040 on Schedule 8812. You will then get to claim any remaining credit or may need to repay any excess received.

Even if you qualify for the full CTC, the advance payments may cause your refund to be smaller or balance due to be higher than previous years.

Deductions for Gifts to Charity

For 2021, there is a special charitable deduction if you take the standard deduction for qualifying cash contributions. The maximum deduction is $600 for married couples filing jointly and $300 for single taxpayers. The deduction is now listed on Line 12b after the standard deduction, so it no longer reduces your AGI like the 2020 special deduction.

For itemizers, taxpayers may elect to deduct up to 100% of qualifying cash contributions for 2021 (the percentage of AGI limitations were increased to 100% for 2020 and 2021 only).

Cryptocurrency Reporting

On the first page of the Form 1040, there is a required question for all taxpayers: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

For tax purposes, cryptocurrencies are treated as property and are subject to tax rules applicable to property. For many taxpayers, cryptocurrencies will be a capital asset, so when cryptocurrencies are sold, these taxpayers will recognize either a short-term or long-term capital gain or loss depending on the holding period. If you received virtual currency as compensation for services or disposed virtual currency that you held for sale to customers in a trade or business, you report that income as you would any other income of the same type (for example as wages or on a Schedule C).

Other Items

April 18 Individual Filing Deadline

• Due to a Washington, D.C. holiday, the individual filing deadline is April 18 instead of April 15 for 2021 tax returns. For taxpayers who live in Maine or Massachusetts, the deadline is April 19 due to the Patriots’ Day holiday in those states.

Child and Dependent Care Credit

• For 2021 only, the child and dependent care credit was enhanced to a maximum of $4,000 for one qualifying child or $8,000 for two or more qualifying children.

Premium Tax Credit If You Have Healthcare Through the Exchange

• For 2021 and 2022, the credit is available for a larger percentage of insurance premiums. The credit is also available for individuals whose income is greater than 400% of the poverty line (who were previously barred from the credit). For 2021, individuals who receive unemployment compensation during 2021 are eligible for the credit under more favorable rules.

Tuition and Fees Deduction Not Available after 2020

• The tuition and fees deduction has been repealed for all tax years after 2020. However, the income limitations for the lifetime learning credit have been increased so that more taxpayers are eligible.

IRA Contributions and Health Savings Account Contributions Allowed Until the Filing Deadline

• Traditional and Roth IRA contributions and health savings account contributions may be made for tax year 2021 through April 18, 2022.

Looking Ahead to 2022

Many of the special provisions enacted due to the pandemic are now over. We must wait to see what changes Congress may consider over the coming months. Progress on the Build Back Better Act stalled last December, so we are still watching negotiations closely to see if there will be major tax policy changes ahead of the midterm election.

As always, we recommend consulting with an appropriately credentialed professional before making any financial or tax planning related decision.

© 2022 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.

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Ask the CFP: What is a Donor Advised Fund?

 

Hello everyone and welcome to this month’s Ask the CFP segment. This month’s question is, “What is a Donor-Advised Fund?” A Donor-Advised Fund is a tool that can be used to help facilitate donations to charity while providing potential tax benefits to the donor. They’re largely used as a tool that makes charitable giving more convenient, while also providing some flexibility. While the first Donor-Advised Funds were created in the 1930s, they’ve grown in popularity over the last decade as institutions such as Charles Schwab and Fidelity have made them more cost-effective and easier to use.

Donor-Advised Funds can be thought of as special accounts where donations can be gifted, but the donor can maintain some control over how their donations are treated after being gifting. For example, I can donate $10,000 to a Donor-Advised Fund and receive an income tax deduction, but I can then decide to invest my $10,000 gift into mutual funds in hopes that my gift will grow to $12,000. One major benefit to Donor-Advised Funds is the ability to invest the dollars after being gifted. I can also decide to keep my $10,000 gift in my Donor-Advised Fund for a year or more before giving it to a specific charity. This means someone can make a gift to their Donor-Advised Fund to receive a potential current-year tax deduction, but actually send the dollars out of the Donor-Advised Fund to various charities at a later time. Because of this unique timing feature, many people make larger donations to Donor-Advised Funds in a single year for a larger tax deduction, while then gifting the dollars to charity in the following years. It’s a bit like taking three to five years worth of donations you were planning on making anyway and grouping them into one tax year for tax reasons, especially if that tax year is higher than normal.

Another reason many people enjoy their Donor-Advised Fund is the ease of making gifts into and out of the fund. You can gift cash into the fund, but you can also gift appreciated stock. With appreciated stock, if you paid $10,000 for a stock that’s now grown to $20,000, you obviously have $10,000 of gains. As long as those gains are long-term capital gains, the IRS allows you to transfer appreciated stock into a Donor-Advised Fund to receive a potential tax deduction on the pre-tax amount of $20,000. This means you could receive a double tax benefit by deducting the value of the stock as well as avoiding long-term capital gains taxes. If you want to give money to 10 different charities, rather than transferring various stocks to each one, you can make one transfer to a Donor-Advised Fund and then gift cash to each charity from the fund. Speaking from experience, it’s much easier this way. Some Donor-Advised Funds also allow for the donation of real estate, life insurance, cryptocurrency and business assets.

It’s worth noting that most Donor-Advised Funds do require a minimum amount of gifting out of the fund every year or so, such as $50. It’s also worth noting that gifts from a Donor-Advised Fund must generally be made to a house of worship, government agency or a 501(c)(3) charitable organization. Since the dollars must be ultimately gifted to charitable causes, the IRS allows some level of flexibility and benefit by using a Donor-Advised Fund. Overall, it’s no surprise why this unique tool continues to grow in popularity, especially for those that are charitably inclined.

If you have a question about this topic or have a question for next month’s video, please send it to MPeek@monetagroup.com. Thanks for watching and we’ll see you next month.

©2022, Moneta Group Investment Advisors, LLC. Trademarks and copyrights of materials referenced herein are the property of their respective owners. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed investment professional before making any investment decision.

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A Full-Blown Assault on the Ukraine jolts Markets and Commodities

Aoifinn Devitt | Chief Investment Officer
Chris Kamykowski, CFA, CFP® | Head of Investment Strategy and Research

As the Russia/Ukraine situation took a tragic turn overnight, governments are jostling to respond to the most blatant act of aggression in Europe since World War II. As the rhetoric moves beyond sanctions to fear of casualties, cyber-attacks and an upending of world order of the past 30 years, Russian and Ukrainian assets have plummeted.

We do not profess to have any edge on the outcome of the conflict. With the path of Western intervention far from certain, and diplomatic overtures dead in the water, there are many different scenarios that could unfold. We can, however, speak to why markets are reacting as they are and what lessons investors should draw from history in order to ride out the current volatility.

Markets abhor uncertainty and even though the current crisis has been building since October 2021, the events still had a feel of “surprise’ given the diplomatic wrestling to the 11^th hour.

The ramifications for the commodities complex are real and are already being reflected in the oil price which is currently over $103 per barrel as we write.

Russia produces over one third of the world’s oil supply and 40% of its natural gas, so events suggest a strain on already stretched energy markets.  Ukraine is a significant exporter of iron ore and serves as a “breadbasket” within European agriculture with its output estimated to feed over 600 million people.

History suggests that geo-political conflicts typically only compound the dynamics that were already in place in markets; in this case, markets were already fragile, displaying sharp volatility and sitting at or near the technical definition for a market correction (-10%) as seen in the S&P 500 and the Nasdaq.  Since mid-December 2021, they have been jostled by inflation fears, the new assertive stance from the US Fed towards pending rate rises, and a cooling off sentiment towards high growth tech stocks.  However, the sell-off has not been universal.  “Old economy” stocks such as energy names, as well as financials which would benefit from higher interest rates, have been well-supported, although to date energy is the only S&P sector in positive territory.

While the sell-off in Russian and Ukrainian assets has been stark developed markets are showing weakness but not severe losses so far through mid-day on 2/24/2022. Additionally, safe haven assets, such as the US Dollar and gold, are modestly higher on the day.

Given the levels of uncertainty currently, markets will need some days to digest the developments and assess what the likely next steps are.  Just as in the case of the 2001 terrorist attacks, the closures from Covid-19, and other geo-political shocks, there will be a period of panic, one of taking stock, and a re-setting of expectations. They key drivers of the economic recovery post-Covid remain the same.  Current events in Ukraine certainly turn up the dial on energy prices and inflation, but there are relief valves for those too – such as releasing energy reserves. We do not believe these events will affect US employment, consumer spending, or technology trends.  The threat of cyber-attacks as acts of war may paralyze some services, but we expect that these will be isolated and not widespread.

Therefore, we recommend not trying to trade this event – but staying close to the news flow, retaining balance across portfolios (watching the diversifying effect of inflation hedges and low-risk fixed income) and staying the course.

©2022, Moneta Group Investment Advisors, LLC. Trademarks and copyrights of materials referenced herein are the property of their respective owners. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed investment professional before making any investment decision.

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Frying Pan into the Fire: Geopolitical risks taunt already unsettled markets

Aoifinn Devitt | Chief Investment Officer
Chris Kamykowski, CFA, CFP® | Head of Investment Strategy and Research

In mid-January, a headline in the Wall Street Journal screamed that “Omicron (had) killed certitude.” The opinion-writer was right; in the first few weeks of the year, certitude has been replaced by sharp market sell-offs, worries around inflation, shifting interest rate expectations, and the specter of war between Russia and the Ukraine.

Over recent months, inflation speculation and indicators finally “crossed over” beyond what policy makers could tolerate and – with a shift in rhetoric – a new “assertive” stance was telegraphed. Inflation levels are at a 40-year high (7.5%) in the US, with a similar pattern in other developed markets, and wage pressures mounting.

This has quickly driven speculation as to the pace and magnitude of future rate rises, with most estimates pricing in 4-5 rate rises in 2022 and some expecting a double (50 bps) rate rise in March as occurred in the United Kingdom, where the Bank of England initiated back-to-back rate rises in January and February – the first time that it has done so since 2004.

Despite the US 10-year nudging above 2% just recently, the yield curve remains remarkably flat, suggesting that rate rises might see a ceiling relatively soon and that the current wave of inflation will not be sustained or drive relentless upward pressure on interest rates. Other factors that suggest the current wave of inflation may prove less sticky are the ongoing strong dollar, the lack of a rush into traditional inflation hedges like gold, and the suggestion that supply chain issues will ease as COVID restrictions are lifted.

For now, supply chain issues and labour shortages are persisting, with energy prices and anomalies such as used car prices driving much of the increase while house prices are also continuing to soar. We recommend building inflation resilience in portfolios by maintaining exposure to inflation-linked assets such as real estate, infrastructure and traditional equities, which tend to provide protection in inflationary environments.

Markets have been decidedly less enthusiastic about the high-growth tech stocks that drove markets since March 2020. Since the beginning of the year, both the S&P 500 and the Nasdaq are in negative territory. Markets have seen a rotation in favor of value stocks and “old economy” stocks such as banks who would benefit from a higher rate environment.

Geo-political concerns have also taken their toll on markets after months of markets shrugging off geopolitical developments. Most prominent at the moment are the ongoing actions by Russia in Ukraine, which have stoked fears of war for the markets and Western government leaders this year. As of February 21, 2022, Russia has formally recognized two separatist, rebel-held regions in the Ukraine as independent and ordered Russian troops into these regions to serve as “peacekeepers.” Western leaders have condemned these actions, characterizing the actions as an “invasion” and announcing efforts to implement sanctions on Russia. Germany was the first to respond with actions as it halted the approval of the Nord Stream 2 pipeline, the $10 billion pipeline carrying natural gas from Russia to Germany. This comes even as energy supplies are already fraught with supply chain shortages and high pricing, as many consumers have experienced at the gas pump or in their heating bill. The US followed this up with additional sanctions such as limiting Russia’s access to Western capital markets and measures targeting key Russian individuals and banks.

Overall, as of this writing, markets are taking the news in stride with modest losses in US and European markets; to be sure, the S&P 500 entered the correction zone as it is down 10% from its early January high. Commodities have been well behaved, although slightly higher,  and US Treasury yields are up modestly. The same cannot be said for Russian equities; The MSCI Russia index is down  -16% in February and -22% year-to-date (Russia represents 3% of the MSCI Emerging Markets index). This is similar to market reaction to the 2014 Russian take-over of Crimea from Ukraine. While there were other factors at play that year (as there are today), markets generally came out of the conflict in decent shape with the exception of Russia, which had the double hit of economic sanctions and oil crashing in late 2014.

As with any confluence of events outside of one’s control, investors may be seeking to “do something” because of the uncertainty arising from a variety of market narratives. However, our recommendation remains the same: stick with the long-term investment plan aligned with one’s goals and risk tolerance while maintaining a diversified portfolio to help weather volatility that the market will undoubtedly experience throughout each year. This strategic approach is aimed at preventing short-term allocation shifts over near-term events, which can create an unnecessary drag on long-term investment results. Broad-based exposures to a variety of asset classes, styles, sub-sectors, and regions will have both winners and losers over time, but will help keep one on the path to success even as markets and events test one’s patience.

©2022, Moneta Group Investment Advisors, LLC. Trademarks and copyrights of materials referenced herein are the property of their respective owners. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed investment professional before making any investment decision.

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