Tensions between Russia and Ukraine are finally beginning to hit markets in a significant way.

Dear Friends,
Tensions between Russia and Ukraine are finally beginning to hit markets in a significant way. European stocks, in particular, are feeling the heat as the continent prepares for the possibility of war on its doorstep. It isn’t just those geographically close to the action that are impacted. Oil prices remain high as Brent crude futures have hovered around $97 a barrel. But the impact the threat of conflict is having on the U.S. bond market is worth watching.
An unusual tug of war is developing as the cusp of war tempts investors to buy U.S. Treasuries—a bona fide safe haven—but surging inflation encourages selling. After topping 2% last week when U.S. inflation reached another four-decade high, the yield on the 10-year U.S. Treasury slipped below 1.92% early Monday. It isn’t just investors who will be closely monitoring the bond market; it will certainly turn heads at the Federal Reserve. Markets are now forecasting a 56% chance of a 50 basis-point hike in March, according to CME’s FedWatch tool. It was above 94% at one point late last week. While gut-wrenching and potentially tragic for people in danger of living in a war zone, geopolitical shocks tend to be short-term hits to the market. What continues to matter most for stocks and bonds this year is the path of Federal Reserve policy.
“The Russia-Ukraine border crisis complicates the near-term market outlook,” wrote Keith Lerner, co-chief investment officer at Truist Advisory Services. “That said, history suggests these types of events, which can be devastating from a humanitarian standpoint, tend to have a fleeting market impact unless they lead to a recession. Our work suggests recession risk in the U.S. remains low. Rising geopolitical risks, alongside the coming Fed transition, argue for continued choppier waters in the markets near term.” We are bracing for continued volatility, and we continue to have faith in the long-term prospects of the market.
However, by pushing energy prices even higher, a Russian invasion would likely exacerbate inflation and redouble pressure on the Fed to raise interest rates. From the Fed’s perspective, the inflationary effects of a Russian invasion (and higher energy prices) would likely outweigh the shock’s negative implications for global growth. We have obviously been watching the events in Ukraine, but we are most focused on the Federal Reserve and its next course of action.
Please reach out with any questions!

Inflation is at a 40-year high

Dear Friends,

There are plenty of reasons why inflation is at a 40-year high starting with low-interest rates, rising wages, supply chain disruptions, and fiscal stimulus that has fueled demand for consumer goods. And all of this is happening at a time when food and energy costs are rising.

The Fed officials long had said they expected the inflation surge to be “transitory,” as it is being driven by supply chain and demand factors largely associated with the pandemic. However, Fed Chairman Jerome Powell recently said it’s time to retire the word as it tends to cause confusion among the public.

Instead, Fed Chief Powell seems determined to bring inflation back under control, and that means the Fed is contemplating a series of rate hikes in 2022. His more aggressive approach created volatility in January, as investors attempted to price in several rate hikes this year.


Now let’s look at recent history and briefly dive into the numbers so we may paint a picture. During the 2004 to 2006 rate-hike cycle, then-Fed Chairman Alan Greenspan said rate increases were likely to be “measured,” as he embarked on a series of quarter-point rate hikes.

His goal was to reassure investors and avoid rocking financial markets. Fed Chief Janet Yellen and later Powell also soothed anxieties by signaling rate hikes would be “gradual” when rates slowly began to increase in late 2015. “Gradual” wasn’t as opaque as “measured,” but the goal was the same: reassure investors. Greenspan and his successor Ben Bernanke raised the fed funds rate from 1% to 5.25% in a predictable series of quarter-percent increases. Yellen and Powell hiked the benchmark rate from 0%-0.25% to 2.25%-2.50% through an uneven series of quarter-point increases, or 25 basis points (bp). One bp = 0.01%.

At Powell’s late-January news conference, he wasn’t making any promises on how quickly rates might rise. He wouldn’t rule out a rate hike at every meeting, beginning in March (there are eight scheduled meetings each year, including January). He didn’t dismiss the possibility of a 50bp increase in March. And, there was no mention of ‘gradual’ or ‘measured.’

All these changes (and speculation), has been a lot for the market to digest. Hence causing the volatility during the last few weeks (among other things). This volatility is likely just beginning, as the market anticipates, witnesses, and digests several interest rate increases this year (and possibly next). The important thing to note, however, is that equity prices can increase during periods of rate hikes, particularly when the rate hikes start from a very low-interest rate, to begin with. Having said that, although we believe volatility is the “new normal,” remember that the market has an upwards bias and a modest repricing is actually a healthy thing for the equity markets.

Please reach out if you have any questions.



“The Russell 2000 is a stock market index measuring the performance of 2000 small-capitalization stocks. It represents the 2000 smallest companies in the Russell 3000 Index, which in turn represents the 3000 largest companies in the U.S. Thus, the Russell 2000 is a barometer of small-cap stocks. Though small, the companies represented by the Russell 2000 are not the smallest of the small as they are not penny stocks. The Russell 2000 is weighted by the market capitalization of the stocks.”
“The MSCI ACWI Ex-U.S. is a stock market index comprising of non-U.S. stocks from 22 developed markets and 26 emerging markets. It is made up of 2,361 constituents, which is 85% of the global equity market aside from the U.S. Sectors covered in the MSCI ACWI Ex-U.S index include health care, industry, finance, consumer staples, and information technology.”
“The EAFE is a broad market index of stocks located within countries in Europe, Australasia, and the Middle East. The EAFE Index contains more than 900 stocks from 21 countries. Investors and asset managers often use the EAFE Index as a performance benchmark for global developed market equities.”
“The Bloomberg US Aggregate Bond index includes government Treasury securities, corporate bonds, mortgage-backed securities (MBS), asset-backed securities (ABS), and munis to simulate the universe of bonds in the market. It tracks bonds that are of investment-grade quality or better.”

According to LPL, the S&P 500 Index was up more than 20% by the end of August for the first time since 1997

Dear Friends,
According to LPL, the S&P 500 Index was up more than 20% by the end of August for the first time since 1997 and it has made a new high every single month this year so far (9 for 9). Incredibly, it made 53 new highs before August was over, the most ever. Any way you slice it, this year is historic for the bulls. The catch (and there’s always a catch) is the S&P 500 hasn’t pulled back 5% all year, with the last 5% pullback in October 2020. Not to mention September is the worst month for stocks since 1950.
But history says that great starts to a year tend to see continued strength in the final four months. “Looking at the previous Top 10 starts to a year ever, the final four months have gained eight times,” explained LPL Financial Chief Market Strategist Ryan Detrick. “So should we see any seasonal weakness, we’d use it as an opportunity to buy before likely continued strength.”
As shown below in the LPL Chart of the Day, 2021 ranks as the 6th best start to a year ever. The previous Top 10 best starts to a year averaged a return of 4.0% the rest of the year, with a very solid median return of 5.4%.
We continue to be cautiously bullish as long as interest rates stay low. We are also looking for pockets of opportunity, whether through European Stocks, high yield private debt, or small allocations to emerging markets. We are also looking to protect our gains, whether through hedging strategies or long/short funds. What could get in the way? Wage/input cost inflation and supply chain shifts are starting to weigh on margins. Interest rate risk is at a record high and valuations leave no margin for error. Well, there you have it.
Please reach out if you have any questions.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.

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