Broker Check

Tune Out the Noise

March 25, 2022
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Imagine you’re an elite athlete. Maybe it’s March Madness, and you’re about to shoot the game-winning free throw. The crowd is screaming in your ears. Opposing fans are taunting you with homemade signs and foam fingers. The opposing team is trash-talking. And, when you look at the faces of your teammates, you can see they are silently imploring you to succeed. In short, there is a lot of noise and distraction, at the precise moment when what you really need is a little quiet. Nevertheless, that’s the nature of the game. The question is, what are you going to do about it? Let it affect you…or tune it out?

Few people will ever know quite what it’s like to perform athletic feats under these conditions. But people like you and me do know something about pressure. About distraction. About noise. About how important it is to not let that noise deter us from executing our game plan. That’s because we’re investors! Every few years, investors are confronted with our own “March Madness.” A time when there’s a lot of noise to contend with. We are going through just such a period right now. The markets have been volatile,
the headlines have been scary, and it’s extremely easy for investors to panic and abandon their game plan. That’s especially true for folks who are nearing retirement. Because the noise may well increase over the next few weeks, I decided to pen this letter. Very briefly, I want to preview some of the noise you’re likely to hear this spring. That way, you can be mentally prepared for it – and like an elite athlete, tune it out entirely. Because whether you’re shooting a free throw or saving money for your retirement, that’s the
best way to keep your nerve, trust yourself…and win. So, without further ado, let’s start with:

Oil

Soon after Russia invaded Ukraine, oil prices – which had already been rising for months – shot up to near-historic levels. There are many reasons for this, but the primary one is based on concern that western sanctions will block Russian oil from reaching global markets. Because traders and speculators expect oil to be less available – and thus more expensive – in the future, they are willing to pay more now for the right to buy it later. After rising as high as $127 a barrel, prices dropped back below $100 towards the middle of March.A few days later, though, prices rose sharply again. It’s safe to assume this volatility will continue. But a lot depends on two factors. First, whether European nations place an embargo on Russian oil. Second, whether other countries – especially in the Middle East – are willing to boost their production to increase supply. The headlines on both issues seem to change daily. So, rather than try to guess – or stress – over which way the needle will land, let’s remember this instead: it’s that very uncertainty that causes
markets to spasm and shudder. The best antidotes to uncertainty, in my experience, are time and patience. Time brings clarity and clarity brings calm. As investors, we have time on our side…which means we can afford to be patient!

Russia


Russia is the major storyline right now. Militarily, economically…and financially. The financial side doesn’t get as much press, but it’s certainly something Wall Street is keeping an eye on. You see, western sanctions have hit Russia hard. They’ve caused the value of the ruble – Russia’s currency – to plummet. The Russian stock market has been closed for almost a month. And they’ve also contributed to the possibility of Russia defaulting on its debt. Here’s the situation in a nutshell. As of 2021, Russia owes around $490 billion in debt to foreign countries/companies/funds, etc.Of that number, $20 billion is hard currency sovereign debt. (Debt that Russia must pay back in the creditor’s own currency, like the dollar or Euro.) Of that number, $4.7 billion was due to be paid in both interest and principal this year. 2 The problem is that sanctions have frozen much of Russia’s foreign currency reserves. That means Russia can’t access the dollars and Euros it has in reserve to pay back these loans. Furthermore, trying to pay them back in rubles would trigger an automatic default. For Russia, and Russia’s creditors, this is definitely an issue. But for the average investor, it isn’t something to lose sleep over. Most bonds – other than some specialty emerging market funds – have little exposure to Russian debt. And even if Russia does default, which it has currently not yet done, there are
other issues that affect us in the States to a far greater degree. Issues like…

Inflation (and Interest Rates)


COVID-19 brought many changes when it burned its way across the world in 2020 and 2021. It prompted lockdowns, wreaked havoc on supply chains, and curtailed everything from watching a movie on the big screen to eating out at restaurants. Slowly but surely, though, our economy has reopened. Unfortunately, while unemployment has dropped
and consumer spending has risen, supply chains are still in recovery mode. That means the world’s demand for goods and services has largely outpaced the world’s supply. This has led to a general rise in the price of everything from eggs to electricity. Economists have a name for this, of course. They call it inflation. As you know, inflation has skyrocketed over the last year. Initially, the Federal Reserve, which is tasked with keeping prices stable, believed inflation to be temporary. So, they focused instead on stimulating the economy to end the recession and decrease unemployment. In recent months, though, the Fed has been forced to concede that inflation isn’t going away on its own. You see, the current low-interest rates prompt more spending and borrowing while discouraging saving. Perfect for juicing the economy during a pandemic! Higher interest rates, on the other hand, encourage saving. This helps the economy cool off, thereby restraining inflation. On March 17, the Fed raised interest rates for the first time since 2018. But the increase was small – just one-quarter of a percentage point.That’s because the Fed doesn’t want to raise rates too high, too quickly, and derail the economy. But this is merely the first in a series of planned increases, all culminating in a level near 2% by the end of the year.3

The Fed has also signaled that if the current plan isn’t enough to bring inflation to heel, more aggressive steps may be necessary. Either way, be prepared for volatile days in the markets leading up to any rise in interest rates. Should this happen, though, remember that rising interest rates have been our expectation all along. Then, proceed with your day – and maybe look at refinancing your home sooner rather than later, if that was ever in your plans. COVID-19 I know, I know. We’re all ready to never hear the word “Covid” again. And with cases dropping dramatically over the past few weeks, there’s hope that the worst is behind us. Nevertheless, as long as the virus continues to fester on some part of the planet, it must continue to factor into our thinking. As I write this, cases are skyrocketing again in China. Scientists have also reported the discovery of a new
variant: BA.2, an offspring of the Omicron bug that hit us so hard in December and January. It’s unknown what these twin developments mean for the rest of the world, but what  I am watching is how COVID continues to affect supply chains. As we’ve already covered, problems with supply are largely responsible for inflation, so a COVID resurgence is the last thing the global economy needs. The good news is the world is better prepared to deal with flareups due to the treatments we’ve developed and the lessons we’ve learned from previous variants. Hopefully, these lessons will help the economy continue to recover in the face of COVID rather than wilt under its onslaught. It's true: COVID remains an issue. Continued vigilance is required. But negative headlines don’t necessarily mean the return of conditions like we saw in 2020 and 2021. The virus may be evolving, but we’re evolving with it!

When an elite athlete prepares to shoot a game-winning free throw, they are usually able to tune out all the noise. That’s because they prepared for this moment. They practiced their technique. They trained their mind. They learned to master their emotions. So, when they step up to the line and prepare to shoot, all that matters is the ball, the basket…and their ultimate goal. Everything else is just noise. That’s what makes an elite athlete. Over the next few weeks, you’re going to hear a lot of noise from talking heads in the
media. You’ll see a lot of distractions when the daily headlines pop up on your phone. But, now you know what to prepare for. Now you know what to expect. Which means you can tune out all that noise. All these issues are important, but as an investor, it’s not necessary to stress or overreact to them. We have a game plan in place for all of this. One set in place long before any of it ever happened. Which means you need never wobble or waver. You can go about your day, confident in your preparations and direction.
That’s what makes an elite investor.

Please let Tina or I know if you have any questions or concerns Let your investment managers sift through the noise so you can tune it out and go enjoy your Spring!

Sources:
1
“Oil Price Charts,” https://oilprice.com/oil-price-charts/
2
“Russian debt default fears stalk bond markets,” Financial Times, https://www.ft.com/content/3f53ad5e-17a3-432b-bf20-99e5256345dd
3
“Powell Says Fed Will Consider More Aggressive Interest Rate Increases,” The Wall Street Journal, https://www.wsj.com/articles/powell-saysfed-will-consider-more-aggressive-interest-rate-increases-to-reduce-inflation-11647880218