Our 2022 Outlook Then & Now

Our 2022 Outlook Then & Now                                   

In 2021, our investment outlook included the likely rise of inflation, primarily due to supply chain issues, and a Fed that would hike interest rates several times over the course of 2022. Because of this we continued to rebalance portfolios to reduce interest rate risk by using short-duration bonds and increased the allocation to value stocks, which generally do well when rates rise. We were also constructive on international stocks, which we believed were finally positioned to outperform the US stock market for the first time in quite a while. We were very pleased with those actions and the markets behaved as we had anticipated, until February 24^th. On that day the Russian army invaded Ukraine which has caused a major change to the economic and investment outlook, at least for the short-term. Our hearts are with the people of Ukraine as they make a valiant effort to repulse the Russian forces. However, according to our conversations with geopolitics analysis experts, we believe Ukraine may only have one hope for peace and that hope lies in the hands of President Xi of China.

President Xi has a lot on his plate right now, the meeting of the Chinese Congress later this year, a slowing economy, and the ongoing pandemic shutting down major cities in China. Putin and Xi were most likely surprised by the reaction of NATO to the invasion and the subsequent hardships the coordinated sanctions have brought upon the Russian economy, its currency, and its people. Putin is most anxious to continue his war until Ukraine is conquered and a pro-Russian leader is installed, however he is dependent on President Xi and Chinese support. Europe and America are the two largest trading partners of China, and they would certainly like to avoid a global recession since exports are the main engine for growth in China at this time.

Putin is certainly a wild card, and the risk of military escalation cannot be ruled out. If Russia were to use chemical weapons or dirty bombs (bombs combined with radioactive materials) this may force the hand of NATO to become more directly involved in the conflict which would increase the risk of a larger conflict. This would most likely result in even higher commodity prices, higher volatility in the markets, and increased uncertainty. Putin finds himself in a trap of his own making and his options appear to be narrowing. If President Xi does not try to reign Putin in, we fear for the worst for the people of Ukraine.

Our clients’ portfolios are managed within a risk-adjusted framework, and we will continue to review them in light of the heightened risk environment in which we find ourselves. We continue to be focused on the long-term, doing our best to help navigate our clients through this most difficult time. We will communicate changes we make and keep you updated on our analysis of the situation as things progress.

Also, we thought it important to mention that cyber-attacks are on the rise, many are Ukraine-related. Please stay vigilant and cautious.

The Bond&Devick Team