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The Bear in the Room

Honestly, I'm not getting a lot done today. I don't know about you, but I've spent most of my day watching the news.

Instead, I want to share a couple thoughts and observations on the current situation. I'll preface all this by saying that I'm a financial planner and my background is in economics, so I'm going to stay away from the geopolitical and diplomatic issues.

That said, there's a good chance that the US economy will feel effects from the Russian invasion. Right now, our economy is strong, but it's built on a shaky foundation. We're still having issues with our supply chain, COVID has yet to disappear, companies can't find enough employees, and inflation is running rampant. Add to that a Federal Reserve who is expected to raise interest rates this year to combat inflation, and you have a shaky foundation.

President Biden has announced sanctions on the Russian economy, so what will that mean for the US? It's hard to tell at the moment and I have more questions than answers. That said, I have a few thoughts.

  • Expect oil, natural gas, and other commodity prices to increase. Russia is a major oil exporter and sanctions against them will naturally target their oil industry. Reduce the available supply of crude oil and naturally the price will rise. We're already seeing this, with prices for Brent crude above $100 per barrel today, for the first time in 7 years. The Nord 2 natural gas pipeline project has also been shut down.

  • The stock market will have trouble finding its footing. At the moment, there's a decent amount of downside risk because no one knows how this plays out. The outsized risk is that the conflict spreads beyond Ukraine. The market can price good information and the market can price bad information. It has problems pricing unknowns, which is where we are at the moment. Expect volatility over the next few weeks at the minimum.

  • Federal Reserve rate hikes are back on the table. Most banks have been forecasting 4-6 interest rates hikes, beginning soon, to curb inflation. The problem here is that while Russia's war in Ukraine will most likely cause increased inflation, the Federal Reserve has few weapons to fight such supply-side inflation. Raising interest rates pushes down demand, which serves to lower inflation. This becomes a problem when the inflation is caused by supply side issues. Think of supply-side inflation as an electrical fire, with interest rate increases as water. Yes, water puts out fire, but you don't want to throw water on an electrical fire.

So what can you do? I posted a podcast on dealing with market volatility yesterday and it's even more topical today. You can listen to it here. In short, there are three things to consider.

  • Stick with your plan. Your investments were chosen for a reason and you shouldn't be making decisions based on short-term fluctuations.

  • Consider tax-loss harvesting in your taxable investment accounts. Tax-loss harvesting can help you by offsetting taxable gains, or even some income.

  • Roth conversions can be helpful. The best time for a Roth conversion is often during a market pullback. The benefit is that you can transfer investments in-kind during a pullback, then take advantage of the future growth being untaxed in the Roth account.

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