Our hearts go out to the innocent victims of Russia’s ill-fated invasion of sovereign Ukraine, and of course matters of economics and investment take a back seat to the human suffering occurring in the heart of Europe. That being said, Appleton Group’s risk-managed strategies continue to be positioned quite defensively, and while the Ukraine invasion is of course getting the lion’s share of the headlines, the markets have actually rallied modestly as interest rates have fallen. That’s typical during a period of geopolitical crisis, and this mechanism has done exactly what it’s designed to do: soften the economic fallout of higher oil prices.
With energy prices moving significantly higher this year, there is another issue worth discussing: the Fed’s diminishing need to raise interest rates. Higher oil prices act as another kind of “brake” for the economy, slowing growth, which is what the Fed wants to do by raising rates. But higher energy prices are also inflationary, it causes other costs to rise (such as food), which is of course not helpful. But it IS better that the alternative, deflation, which destroys capital and hurts the economy far more than rising prices. The situation in Ukraine may have two economic silver linings: 1) the Fed might not need to be as aggressive as previously thought, and 2) higher oil prices will hasten the move to more renewable energy investments.
We continue to make strategy adjustments to our client’s portfolios as the situation unfolds, and at some point there will be a concerted shift back toward the assets we want to own in each strategy. But just like in the Super Bowl, “defense wins championships” and so far this year our protective measures are helping a lot.
