Russia, inflation, rate hikes, Covid: Q2 will be full of headwinds, but markets are ready

Surging inflation, Russia's invasion of Ukraine and a speed-up of the Federal Reserve's rate-increase plan created a series of unique challenges for investors, which led to volatility about 50% higher than the same period in 2021.

There's no shortage of headwinds going into the second quarter, many extended from the previous quarter. But at this point analysts have had time to digest them and strategize.

"If your goal is to avoid all risk, then you shouldn't be in the market," said Liz Anne Sonders, managing director and chief investment strategist at Charles Schwab. But when there are big swings and heightened risk, a plan is necessary.

Here are the problems analysts are watching for this quarter and how to plan for them.

Geopolitical unrest

Russia's invasion of Ukraine has stunned markets across the globe. The geopolitical unrest has rippled through energy markets, commodities and even to food insecurity issues.

It's incredibly important to factor these problems into your investment calculus, said Josh Leonardi, director of prime services at TD Securities. He's looking at commodities markets to hedge the Russian conflict, and he likes wheat in particular. About a quarter of the world's wheat supply comes from Russia and Ukraine. Future contracts for the crop are jumping as supply becomes scarce but demand remains the same. Oil and gas are trickier because they're so volatile and prices move quickly alongside headlines. But If the price of oil continues to rise, airline stocks will see a secondary impact as well.

Inflation

The US is currently battling an inflation problem it hasn't seen the likes of in 40 years, so it's time to look to real assets as a hedge on inflation, said Leonardi. That means investing in commodities, real estate, land, equipment and natural resources.

Interest in real estate investment is exploding, he said. "I don't know if anything is hotter on the market right now. You have everything from single multi-family homes to data centers to cold storage facilities."

When investing in markets, look to companies that make money off of inflationary spikes. Banks earn more as interest rates rise and they profit from wider spreads. Companies with low capital needs are also good bets.

Here comes the Fed

The Federal Reserve is probably going to be aggressive in raising interest rates going forward, said Sonders.

Typically investors believe in a safety guard known as "The Fed put." It's the notion that enough market weakness will cause the Fed to stop raising interest rates and tighten policy, and perhaps even reverse and ease rates. Because inflation is so out of hand, there's no way that's going to happen again, said Sonders.

"Investors need to be aware of that, especially if they're being more aggressive because they think the Fed won't let markets down," said Sonders. They'll continue to raise rates and will do it to slow economic growth. That means the risk of recession is higher than it otherwise would be.

Covid waves and other unforeseen emergencies

Emergency situations are a good time to play it safe, and to revert to investing basics, said Sonders. Make sure your portfolio is diversified. Take advantage of volatile swings by staying in gear and rebalance investments: add low, trim high.

If your portfolio swings one way — say the equities market grows by 15% — take advantage of that, sell some off and then pare it back. As Sonders said, "Let the volatility work in your favor."

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