War, Rate Hikes, and Inflation: Investing During Uncertain Times

Investing has never been easy, yet it seems like right now is probably one of the worst times to be an investor in the US. If you think about it, Americans are confronting at least four significant challenges outside their control. We are not yet fully out of the pandemic inflicted consequences; there’s the generationally high inflation to worry about, interest rates are set to rise, and if that’s not enough, Russia then decides, you know what, let’s invade Ukraine. So, how do you as an investor react to all these uncertainties? Has your financial plan been built with allowances for these challenges, or is it based on overly optimistic assumptions? 

Any time you invest in something, you’re essentially putting your money at risk, so the inherent levels of uncertainty mean that you never know what to expect. However, when unprecedented threats such as war or recession arise, the level of uncertainty increases significantly because now companies can no longer predict future outcomes. And while it’s impossible to predict what will happen when all of this is over, many of the same investing principles still apply today. Moreover, sometimes it doesn’t matter what you choose to do during uncertain times, but we all know you can’t go wrong over the long term by keeping yourself well-informed and taking advantage of opportunities when they arise.

Understanding High Inflation and Rate Hikes 

Interest rates and inflation are like two peas in a pod. They tend to move in the same direction simply because the Fed likes using interest rates to combat inflation. So, if inflation is on a high, then the Fed raises interests to try and manage the inflation. If you’re like most people, you probably don’t understand how high-interest rates lower the risk of inflation. But what happens is that the Fed often responds to elevated inflation risks by raising its benchmark federal funds rate. When this happens, it effectively increases the level of risk-free reserves available to banks and other financial systems, limiting the money supply available for purchases of assets. Financial institutions then respond by increasing borrowing costs and rising interest rates to discourage consumer and business spending. 

All in all, sometimes the inflation mindset can be more dangerous than market movements. Most times, people’s expectations about future inflation are actually a driver of inflation. So if a series of events happen that make inflation a possibility and people believe that inflation is on its way, then inflation will undoubtedly come knocking.