A Roller Coaster Market of Inflation Fears and International Concern

April 21, 2022

As we entered the final months of trading for last year, we asked the question, “Have we seen the market highs for the year?”  Our estimation at the time was, “We are going to lean to an answer of … yes.”  The markets did find new highs. See our comment here: www.affinity-cap.com/blog-01/two-questions-about-market-today

The following month we stated, “We are pleasantly surprised by the strength of the stock market and have maintained our portfolio allocations to participate in these gains even though we have numerous concerns that we highlighted last month.” We explained our belief that companies buying their own stock in huge quantities was artificially propping up the markets: www.affinity-cap.com/blog-01/newtons-laws-motion-rising-markets-share-buybacks-0

We also said that we believe that inflation and rising interest rates are the primary issues on which the markets will focus.

Other issues included COVID, inflation, semiconductor chip shortages, goods shortages due to supply chain disruptions, Chinese regulatory crackdowns, the U.S. debt limit, … Federal Reserve tapering of interest rate risk and rising oil prices.

We also asked the question, “are we facing a long list of worry or opportunity?” First, we believe part of our job is to worry for you so you can sleep better at night. We are always concerned about what might affect your portfolios and then try to minimize those concerns. In the short term, we do see challenges that should be monitored. As for opportunities, they may be more difficult to realize going forward. As of today, we believe that the markets will be challenging through the mid-term elections on November 8, 2022.

We were in fact correct in our beliefs at the end of last year, just a bit early in our call.

One of our key concerns for over a year has been inflation and rising interest rates. We add a current concern of the situation with Russia and Ukraine as well as the opportunity China may exploit regarding Taiwan.

Inflation and Rising Interest Rates

There are two key barometers which Wall Street investors monitor closely. One is the yield on the 10-year Treasury note. The 10-year Treasury note is a debt obligation -think of a bond or a certificate of deposit - issued by the United States government with a maturity of 10 years. It pays interest at a fixed rate or yield.  

The 10 Year yield started in January at 1.52%. Last week it had spiked to 1.87%. While the numbers may appear small, that is an increase of 22% in just a few weeks and the expectation is that it may go higher. This is confirmation of inflation fears that we all see each day in the prices of gas, food and most everything consumers and businesses purchase. A little inflation means a growing economy, an elevated level of sustained inflation equals a host of problems for our economy. Right now, it is the fear of future uncontrolled inflation that is so concerning to the markets.

The second key barometer of inflation and rising interest rates is The Federal Open Market Committee or the FOMC. This is the branch of the Federal Reserve System whose mission is to promote stable prices and economic growth. Simply put, the FOMC manages the nation's money. The twelve members of the FOMC meet eight times a year to discuss whether there should be any changes to near-term monetary policy.

As their mission to promote stable prices involves fighting inflation, their actions are closely monitored by the markets. It is forecasted that the FOMC members may vote to raise rates as many as three times this year in an effort to slow the rate of inflation.

Russia and Ukraine / China and Taiwan

Mixed signals abound within the question of whether Russia will make advances on Ukraine. In 2014, Russia moved into parts of Ukraine and still maintains control of key areas. Russia sees Ukraine and all the satellite countries of the former USSR as traditional and historic pieces of their homeland. Russia fears that Ukraine or other bordering countries may be invited to join The North Atlantic Treaty Organization, NATO, which has agreements to defend any member countries against aggression.

Russia has vast energy, mining, and agricultural resources. Disruption of these industries through further sanctions or military conflict would have serious repercussions for world markets.

At the same time, China has increased their verbal rhetoric and their military activities around Taiwan. The question of Taiwan’s sovereignty from China dates to 1949 although it is a long and complicated history. Taiwan is a rare case in which Washington has a security partnership  with an entity with which it does not have diplomatic relations.

Our response for much of the past year regarding inflation and economic concerns has been to lean towards value versus growth and focus on traditional guards against inflation such as financials, interest-rate hedged bond funds, a REIT fund, or Real Estate Investment Trust, and energy. We also have an allocation to Treasury Inflation-Protected Bonds although this is an investment in which the name implies an obvious solution to rising rates, but the mechanics of these securities are a bit more complicated and require close monitoring.

Here in 2022, we have sold our international fund, sold our remaining position in small cap growth as well as our Nasdaq mid-cap fund and maintained a higher level of cash that will serve us well if this market volatility continues. We added to our technology heavy Nasdaq position as it weakens and may add more if it falls to another key support level.

In our evaluation of the more technical aspects of the buying and selling in the markets, we see some key breakdowns in numerous areas. While we could see buyers come into this market looking for bargain days, we remain cautious and watchful.

What We're Watching This June — Market Thoughts for You

June 1, 2026
As we turn the page to June, markets find themselves at a familiar crossroads: optimism tempered by uncertainty, momentum tested by macro headwinds. May closed on a constructive note, with equities finishing the month at or near all-time highs — a remarkable recovery from the turbulence that defined the early part of the year. The dominant theme of 2026 has been resilience in the face of disruption. From the tariff volatility of the first quarter to geopolitical shocks in the Middle East, investors have repeatedly demonstrated a willingness to look through near-term noise toward the fundamentals. That posture has been rewarded. The S&P 500 has returned over 10% year-to-date, driven in large part by an exceptional earnings season — first-quarter blended growth came in above 28%, the strongest pace in several years — and continued enthusiasm around artificial intelligence investment. Yet the risk landscape heading into summer is far from benign. The conflict in the Middle East remains the single most important variable in the macro calculus. Energy markets have been severely disrupted, with Brent crude up sharply on the year despite recent relief as hopes for a resolution in the Strait of Hormuz gained traction. Oil prices are not merely an energy story — they are a consumer story, an inflation story, and ultimately an interest rate story. A durable peace agreement could be a meaningful tailwind; a breakdown in talks, the opposite. The bond market deserves particular attention. One of the defining features of this cycle has been the breakdown of the traditional stock-bond diversification relationship. Since the onset of the Middle East conflict, long-duration Treasuries have failed to provide the ballast they historically offered during periods of equity stress. Sticky inflation, persistent fiscal deficits, and energy-driven price pressures have conspired to keep yields elevated. Investors relying on a classic 60/40 framework may find that the playbook requires updating looking into high quality corporates. On the monetary policy front, the transition at the Federal Reserve — from Chair Powell to Kevin Warsh — has so far been absorbed calmly, with equity and bond volatility both declining in recent sessions. The Fed's path remains data-dependent, and this week's jobs report will be closely watched. Consensus expects the unemployment rate to hold near 4.3%, consistent with a "low hire, low fire" labor market. More interesting may be the wage data: softening wage growth could constrain consumer spending at a moment when the personal savings rate is already under pressure. Globally, the picture is more nuanced than a simple risk-on or risk-off framing suggests. European equities outperformed in May, while the ECB is now actively signaling the possibility of rate hikes in June — a stark contrast to the easing cycle many had anticipated a year ago. Emerging markets have staged a meaningful recovery, supported by AI infrastructure spending and a softer U.S. dollar. The macro divergences between regions are as wide as they have been in years, and that creates both risk and opportunity depending on how portfolios are positioned. Seasonality is worth noting as well. June has historically been a challenging month for equities in midterm election years, and after a sharp rally off the March lows, some degree of consolidation would not be surprising. Markets rarely move in straight lines, and the conditions for short-term choppiness — elevated geopolitical risk, a pivotal central bank meeting in Europe, key economic data releases, and a VIX that has returned to complacency — are present. The bottom line: the fundamental backdrop remains broadly supportive, earnings momentum is intact, and long-term investors have been well-served by staying disciplined. But the risks are real and the range of outcomes is wide. In an environment where traditional hedges are less reliable and geopolitics can move markets overnight, diversification, quality, and a clear-eyed view of one's own time horizon matter more than ever. As always, we are here to discuss how these dynamics relate to your specific situation. Please do not hesitate to reach out.

The Order of Returns

April 29, 2026
The first four months of 2026 have been a useful reminder that markets do not move in straight lines. After entering the year at record highs, U.S. equities pulled back sharply on geopolitical tensions tied to the Iran conflict, with the S&P 500 coming close to a ten percent decline before recovering much of that ground. Volatility has returned again on rising energy prices and a softer tone from the technology sector that has carried so much of this cycle’s leadership. Oil sits near one hundred dollars per barrel, the ten-year Treasury yield hovers near four and a half percent, and traditional diversification between stocks and bonds has been less reliable than many investors have come to expect. None of this changes our long-term view. It does sharpen a conversation we believe every household within ten years of retirement, on either side of that line, should be having right now. THE QUESTION THAT MATTERS MOST After more than thirty years of advising families through every kind of market, I have come to believe that one question matters more than almost any other in retirement planning. It is not what your average return will be. It is not even how much you have saved. The question is this: in what order will those returns arrive, and what will the portfolio be doing when they do? Two households can finish their working years with identical balances and identical long-term average returns. One can run out of money. One can remain wealthy for life. The only difference between them is the order in which good and bad years happened to fall. WHY ORDER MATTERS MORE THAN AVERAGE When a portfolio is accumulating, a market drop is something close to a gift. Contributions buy more shares at lower prices. When a portfolio is distributing, the same drop is a wound. Every dollar withdrawn during a downturn cannot participate in the recovery, and the base from which all future growth compounds is permanently smaller. Retirees who began withdrawals in 1973, in 2000, or in 2008 lived through outcomes quite different from those who retired even two or three years earlier or later. Same averages over the long arc. Very different lives for the family. THE RETIREMENT RED ZONE Retirement planning does not begin the year you stop working. It begins five to ten years before. We sometimes call that window the retirement red zone, and it is the period in which the wrong portfolio, held too long, can do real and lasting damage. A portfolio that served someone beautifully through their fifties is rarely the right portfolio for the first decade of withdrawals. Waiting until the retirement date itself to reposition is not a plan. It is a hope. HOW WE REPOSITION PORTFOLIOS Repositioning is a multi-year process, not a single trade. We model honest cash-flow needs in dollars. We construct one to three years of withdrawals in stable, liquid reserves so no client is ever forced to sell equities into a falling market. We build an intermediate layer of high-quality bonds to refill those reserves over time. We sequence withdrawals across taxable, traditional, and Roth accounts to manage lifetime tax cost, often using the years before Social Security and required minimum distributions for thoughtful Roth conversions. We rightsized concentrated and legacy positions over multiple tax years. And we stress test the plan against a meaningful market drop in year one before any client crosses the retirement line. A CLOSING THOUGHT Sequence risk is not really a math problem. It is a human one. The discipline to reposition during good markets, when it can feel almost unnecessary, is what separates retirees who sleep well from those who reach for the wrong decision at the worst possible moment. By the time a dramatic market drop arrives, the work either has been done or it has not. Whether you are a long-time client of Affinity Capital or considering a relationship with our firm, we would welcome a conversation about how your portfolio is positioned for the years ahead.

What a Noisy World Means for Your Portfolio

March 26, 2026
If it feels like the news cycle has been louder than usual lately, that's because it has been. Geopolitical tensions across multiple regions, shifting U.S. trade relationships, and a rapidly changing domestic political landscape are all contributing to elevated market volatility. We want to take a moment to share our perspectives on what this means for your portfolio and for the broader inflation picture. What's Happening Globally We are in an extraordinary moment. The U.S. is reshaping its economic and geopolitical relationships in ways that are accelerating global fragmentation and creating real uncertainty for businesses and investors alike. Energy markets have been particularly sensitive to these developments, with commodity prices responding sharply to supply disruptions and shipping route concerns. Most forecasters believe current disruptions are short-lived and expect prices to moderate as conditions stabilize, but the range of outcomes remains wide. Closer to home, affordability has become the defining political issue heading into the midterm cycle. The administration is rolling out consumer-focused measures around housing costs, prescription drugs, and credit, which could benefit some sectors while creating headwinds for others. What This Means for Inflation The inflation picture is nuanced right now. If current disruptions prove temporary, the impact on consumer prices should remain limited. However, if tensions persist and energy prices stay elevated, we expect to see some upward pressure on inflation over time. It is worth keeping in mind that energy prices, while attention-grabbing, are historically less influential on long-term inflation than factors like wage growth and domestic demand. The broader U.S. picture reflects a tension between tariff-driven price pressure on one side and softening economic momentum on the other. The Fed is navigating this carefully, balancing inflation concerns against labor market signals. For now, rates appear likely to hold steady near term, with modest cuts possible later in the year if conditions warrant. How We're Thinking About Your Portfolio Volatility is uncomfortable, but it is not the enemy of long-term wealth building. History has demonstrated consistently that market disruptions driven by geopolitical events tend to be temporary in nature. Long-term investors are best served by staying anchored to their goals and risk parameters rather than reacting to the news of the day. This environment does reinforce several principles we apply in managing your portfolio: maintaining thoughtful diversification, ensuring fixed income allocations reflect your actual income needs, and being intentional about where inflation and energy exposure sits within your overall strategy. We are monitoring developments closely and will continue to adjust positioning as the picture becomes clearer. As always, if anything here raises questions specific to your situation, please reach out. That conversation is exactly what we are here for.