The U.S. Federal Reserve, Russia/Ukraine conflict, and Inflation

Dear Clients and Friends of Bauer Wealth,

Hello and happy March! It’s hard to believe we are already approaching the end of the first quarter of the new year. Spring is in the air. 

We often speak to each of you about the dual mandate we have at Bauer Wealth, to protect assets to the best of our ability but also to position portfolios for growth and income. This focus has been especially underscored over the last few years as we saw some of the largest swings in the history of the stock market, both to the downside and in rapid increases to the upside.

And while no one can predict the future, in our estimation there is a higher degree of risk in the asset markets currently than there has been in the previous 40 years. Traditional safe-haven assets like U.S. Treasuries, gold, investment-grade corporate bonds, and cash all have potential pitfalls with the current situation.

As your guide to help navigate these choppy waters our mandate has not changed. We will continue to position everyone to the best of our abilities to not only protect your wealth but also to position portfolios to have exponential growth potential in the next upswing.

Current Market Conditions

As many of you know, there is more risk in the bond market currently as the Federal Reserve is poised to raise interest rates this month, as well as stop, quantitate easing. All else held equal, bond prices fall when interest rates go up. Bond prices are also impacted by supply/demand economics. When the current biggest buyer of debt (Fed) leaves the game, it reduces the buy-side of the bond market (decreases demand) which could add on to the already falling bond prices. On top of this, many economists believe the Fed will start Quantitative tightening soon after, most likely over the summer. This means they will re-enter the market as a “seller.”

Due to the actions of the Fed, bonds do not give us the historical safety and inverse correlation to equities as we have previously been able to depend upon for the last 40 plus years. As interest rates go up, the risk premium for stocks becomes less desirable. As this happens, future expectations for earnings slow, and stock prices come down to match new expectations.

We have been expecting this for the last six months as inflation readings started to grow faster than expected. We took opportunities last August, October, and January of this year to lower our equity allocations and buy alternative investments giving us additional downside protection but simultaneously maintaining upside potential.

On top of this, almost all of our bond exposure has been removed from the portfolio with the only remaining holding being very short term with low volatility. We expect these short-term bonds to still pay us more than a money market over the next 6-12 months and not be impacted much by rate hikes. 

It also appeared as though inflation might have peaked in January or February of 2022, but new geopolitical issues have continued to push commodity prices higher (Russia/Ukraine/Oil). Risk-on assets correctly sniffed out this change and staged a rally (albeit tepid) from late January through mid-February. Since then, however, we have seen a series of lower highs throughout nearly every sector in the S&P 500. 

For these reasons, we continue to be cautious with our macroeconomic outlook for the coming weeks and months.

Current Allocations

Despite the escalating war between Russia and Ukraine–the Federal Reserve still seems intent on its hawkish stance. At the time of this writing, the market anticipates a 25 bps hike in the Federal Funds rate and no additional asset purchases. Some traders have hinted at a 50 bps hike but this now seems unlikely given Jerome Powell’s latest comments. Either way, this will be a headwind for bonds and stocks in the short term and has driven our current allocations to be more conservative. Depending on your financial objectives and tolerance for risk, Bauer Wealth models are currently allocated in the following manner: 

  • 20 – 40% Total U.S. Stock Market 
  • 0 – 10% Individual Alpha Stocks
  • 7.5 – 13.5% U.S. Blue-Chip Growth Stocks
  • 2.5 – 4.5% Global Healthcare Stocks
  • 7.5 – 13.5% U.S. Small-Cap Stocks
  • 7.5 – 15% Developed International Stocks
  • 2 – 4.5% Emerging Market Stocks
  • 2- 5% Commodities
  • 5 – 25% Deep Buffered S&P 500 
  • 1.5 – 7.5% Short-Term Low Duration Bonds
  • 3- 10% Structured Notes
  • 2 – 18% Cash

Please log into your mobile Bauer Wealth App or Desktop portal to see your current allocation.


While it can be hard to profit during inevitable stock market downturns, we can do our best to maximize longer-term investment gains by buying ownership stakes in great companies when they trade at discounted prices. We did this during the pandemic and will continue to be opportunistic in the coming months. Given that we are currently flush with cash and maintain a moderately defensive posture, we will be ready to scoop up additional shares and/or rebalance the portfolios into desirable sectors over time. It’s an exciting time to be a part of the rapidly growing Bauer Wealth family! We are honored that you have entrusted us to manage your hard-earned savings and investment portfolios and we look forward to seeing you all again very soon. 

Stephen, Dan, and Chris

Photo by Johannes Plenio from Pexels

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