With ongoing supply chain constrictions, international conflicts, and the resulting inflationary prices and potentially rising interest rates, it is an understatement to call the economic environment uncertain. As a result, it’s prudent to consider expanded investment options and seek wealth-management advice.
The Federal Reserve is expected to increase rates in March to combat inflation, yet the Russian invasion of Ukraine may change its calculations in the event of a potential worldwide energy shock. Given these uncertainties, however, it’s still safe to say that the Fed is shifting policy gears, a situation that likely will continue throughout 2022.
The investment environment is changing as the Fed shifts policy priorities. Many economists predict that we’ll see the first interest rate increase in March to coincide with the Fed’s reduction in securities holdings, which is expected to commence as early as mid-year.
It’s impossible to predict at what pace rates will shift and what effect the shifts will have on asset prices. What’s more certain is that the reduction of fiscal and monetary stimulus will put the economy more firmly in control of the real economy, which is driven by the consumer.
New Investment Priorities?
Wealth management strategies will need to be more agile as the Fed shifts gears. Our economists tell us that it should become more clear what assets and markets were driving on the fuel of Fed liquidity and which were powered by their own economic growth.
Wealth management trends to this point have favored growth equities. The lack of attractive alternatives to stocks has kept capital from leaving the market when historically it might have. And corporate earnings continued to provide the necessary validation for investor optimism. With the probability that will soon change, so should the way investors view the markets.
The up-and-down markets this year make it more difficult to see gains in stocks. It could be even more difficult without the Fed’s safety net. Value investing, for one, has gained more attention.
It also may be time to look at asset classes that have been largely forgotten. Even as uncertainties continue, potential opportunities could lie in asset diversification. Diversification is not dead.
Diversifying into other asset classes that have not been rewarded in the last few years may make sense. In addition, investments in international equities should be looked at carefully as well.
A Year of Ongoing Review
Throughout the year, we’ll likely see continual shifts in economic activity and policy, especially with the mid-term elections in November. It’s a good time to review your accounts, diversify, and plan for the coming tax changes.
When it comes to diversification, for instance, there are a few things to be aware of. Learn how foreign investments, commodities, and other investments fit into a diversified portfolio. Make sure your advisor considers the timing of any changes from both an investment and tax perspective.
The current environment is also a good time for business succession planning. If you have a business, meeting with your advisors is essential. Depending on how you plan to transition your business, it may have ramifications for your estate planning and your long-term financial goals as a whole. As the law currently stands for estate and gift tax planning, the amount you will be able to pass tax free during your life or at death will be reduced in a few years. Making sure your current planning aligns with a coming smaller estate and gift tax exclusion amounts is a discussion you should have with your advisors too.
A year of changing economics of conditions calls for a good review of changing investment priorities. We may not know the future or the responses of policymakers, but we can review accounts and put our financial houses in order.
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Wealth Advisory Services does not provide accounting, legal or tax advice. This information discusses general economic and market activity and is presented for informational purposes only and should not be construed as investment advice. Views and opinions expressed herein do not account for any specific investment objective, restrictions, and/or financial circumstances of any specific client. Investors are urged to consult with their financial advisors before buying or selling any securities.