Top Three Factors of Volatility in 2022

Before I get into the specifics about what is causing volatility in the summer of 2022, I’ll describe what it is and why individual investors should care. (If you want to skip ahead, click here.)

What is volatility?

Volatility is unpredictability in investments. It is generally characterized as rapid, unpredictable changes in the price of an asset but can also refer to changes in return or expected future value.

Is volatility terrible for my financial plan?

It’s different for each individual, but volatility increases uncertainty. We often measure financial plans in terms of percent success. For projections with a high likelihood of success, volatility can add more uncertainty and lower your chances of success.

There are some rare instances where it can be a positive. For example, loss harvesting and Roth conversions can help lower your tax bill. These strategies are most effective when the market is down. If they seem attractive, be careful. They need to fit into your overall tax strategy, and doing them wrong could end up costing you more in taxes in the long run. In other words, don’t try this strategy without a comprehensive financial plan.

Is volatility ever a good thing?

Investors can sometimes benefit from volatility. Asset values can move in both directions. Investors can benefit from rebalancing or investing if the decline in value is only temporary. Essentially, it can be like buying stocks when they are on sale.

What is causing volatility in the summer of 2022?

Russia, Inflation, and China are causing volatility in the summer of 2022. Although many factors can affect future prices and market behavior, these are the top three today. This conclusion is based on recent market movements and investment analysts’ commentary.

Inflation

Specifically, how consumers, businesses, and, most importantly, the government[1] will react to inflation. In general, actions that curb inflation can cause a recession. The government’s goal is to get inflation to reasonable levels without causing a recession, but that is easier said than done. Price caps, higher interest rates, and cutting spending can lower inflation but raise the risk of a recession.

Interestingly, as of Summer 2022, we are not technically in a recession, but many experts predict a recession by the end of 2022. If you are thinking of trying to time the market, you might be too late. Analysts have mixed opinions about whether or not the market prices already account for the planned inflation.

Russia

Russia, specifically the Russian invasion of Ukraine, creates uncertainty. At its best, experts worry about significant economic disruptions, including a European energy crisis, debt defaults, and food shortages in Africa. Other experts fear a more profound escalation to war with NATO countries.

All of these are bad outcomes that are driving down markets.

China

China is having a hard time dealing with Covid. Their draconian measures made it difficult for many people to get to work. This fall in output may result in good shortages here in the US and less spending in China.