Ukraine, Inflation & the Fed

March 04, 2022

All Roads Lead to Inflation

Volatility is the Cost of Investing

The calendar had barely flipped to 2022 and investors were reminded that even attractive long-term stock returns come with a cost: volatility. The S&P 500 Index fell nearly 12% from January 3 through February 23 amid fears that the Federal Reserve (Fed) will have to get a lot more aggressive to fight inflation. After such a steady march higher in 2021, the dip may have caught some investors off guard.

Market Reaction to War

Last night war began in Ukraine. As Putin attempts to redraw the map, the fog of war and the uncertainty that it brings will inflate commodity prices and reduce your purchasing power at the pump and on Main Street. The destruction of people and their homes will ensue. Also, global efforts like NATO Alliance and the United Nations will attempt to check empire-building ambitions.

In the short-run inflation and the war in Ukraine will influence markets. In the long-run stocks should become an obvious value over cash or bonds. Time and time again stocks have outperformed cash and bonds in inflationary and stable price periods.

As our LPL Chart shows, the S&P 500 fell 5% on average in 20 major geopolitical events dating back to the attack on Pearl Harbor in 1941. Nevertheless, the S&P 500 recovered those losses in fewer than 50 calendar days on average.

Stay the Course

For those whose anxiety levels may have risen a bit, here are some numbers that might provide reassurance:

  • Even in positive years for the S&P 500, on average the index experiences a maximum peak-to-trough decline of 11%. This year’s max drawdown is now 9.8%.
  • After a correction of 10-15%, the index has experienced an average one-year gain off the lows of 22% and has risen in 12 of the 13 one-year periods.
  • The average stock market gain one year after the first Fed rate hike of an economic cycle has been 11%, with gains the past eight cycles dating back to 1983.
  • When investor sentiment is most negative, as it was during the past few weeks based on the American Association of Individual Investors (AAII) investor sentiment survey, stocks have risen an average of 11% in the next year.

This data argues that stock investors should stay the course, while remembering that gains in 2022 will likely be tougher to come by than in 2021. They may be more modest and happen later in the year, as is typical during midterm election years.

If you’re worried about the financial markets, please reach out. I understand that current events can be a bit overwhelming, and you may feel the need to be proactive. Always remember, we created your financial strategy based on your goals, time horizon, and risk tolerance, and we anticipated there would be unsettling events along the way.

P.S. To watch and learn about inflation, click the video above.

Important Information

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

All data is provided as of February 2, 2022.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All index data from FactSet.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.