Ukraine clouds political outlook
Lately, the school of amateur epidemiologists who graduated just in time to pass judgement on the pandemic have hung up their lab-coats and donned their military fatigues to opine on the situation unfolding in Eastern Europe.
With their spirits perhaps flattened by the Omicron détente, this detachment of armchair generals is finding new excitement extrapolating Russian stratagems in lieu of case counts.
As much as Ukraine’s fate might rightly divert us, and fill column inches, ultimately the resultant effect on well-constructed portfolios will likely be no more than a rounding error. Though some sort of incursion seems more probable than not, the major powers are strongly incentivised against any sort of all-enveloping conflagration, just as was the case in Georgia in 2008 and Crimea in 2014. The role for investors is to resist the self-defeating urge to take evasive action.
In fairness, doing nothing has not been easy. The advent of the Year of the Tiger has been a wild ride in markets; the transition back to the old normal was never going to be a breeze.
Bank of England expected to hike rates
With concerningly high inflation, the Bank of England is now firmly expected to raise interest rates to 0.5% this Thursday, which would be an uncontroversial move were it not for the great difficulty we have at the moment in discerning exactly what shape the underlying economy is in: is that a healthy pulse or fiscal stimulus? Is that ruddy hue the retreat of COVID-19 or a rash policy? In the UK specifically, fresh ex-EU status occludes the crystal ball still further.
Across the pond, several well-regarded economic indicators will be published this week, adding fuel to the debate. Markets are in thrall to the slightest motes of data that might give a whiff of the Federal Reserve’s thinking on the path of US interest rates – the topic dominating financial headlines so far this year.
Heightened interest in key decision
The reason for this febrile mood has its roots in the financial crisis. Since then, central banks have been dispensing emergency monetary medicine – ultra low interest rates plus quantitative easing (QE) making it even more attractive to borrow money – in order to gee up growth.
Arguably, that prescription wasn’t especially necessary once the patient had left intensive care. But the Federal Reserve effectively tied, and then sat on, its own hands, saying as long as there wasn’t any inflation, it would let things run.
Now there’s finally a case for putting the monetary foot on the brake to control rising prices lest they become self-reinforcing through higher wages, and so on. So far, it has been a gentle nudge down on the pedal to see if a market unused to such tempering throws another tantrum: ‘would you mind awfully if we raised interest rates ever so slightly at some point?’
Elevated volatility reflects murky picture
Yet, at the same time, the QE pump has still not been turned off, let alone reversed. We’re seeing enormous government spending, despite a wall of savings built up in lockdown. And we’re facing the unquantifiable long-term effects of the pandemic, including huge numbers of job vacancies and unresolved supply chain disruption. On top of all that, oil has just hit its highest level since 2014, largely due to those simmering geopolitical tensions.
Might the global growth engine stall if interest rates are raised too much, too soon? Or will inflation reach escape velocity if central bankers do too little, too late?
Amid this uncertainty, the Volatility Index (also known by its more sinister moniker ‘The Fear Index’) rose to roughly twice its long-term average. The last time it spiked like this was… oh… last month…
Plus ça change
What should investors make of all this? Reflect on the fact that yesterday’s considerable fears – most notably the ominous threat posed by the Omicron variant – have subsided. Today’s will, too, in time.
The case for long-term investing remains intact and attempts at timing the market remain folly. So tune out the noise and stay the course.
Past performance is not a guide to future returns. Please note that the value of investments can go down as well as up, and you may get back less than you originally invested.