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• May 3, 2022

The first quarter of 2022 was marked by historically high inflation, a shift in central bank policy, and the Russian invasion of Ukraine. The broad market uncertainty created a challenging market environment for investors, leaving major equity and bond markets much lower for the quarter.

High inflation influenced a change in policy stance from the Federal Reserve ("Fed") and other central banks early in the quarter, signaling that they would take action to tighten their previously accommodative policy to soften demand and potentially quell inflation. This led investors to reassess current valuations in anticipation of higher interest rates.

In February, the invasion of Ukraine also led to broad market uncertainty and significantly impacted the supply of goods. Both Ukraine and Russia are large suppliers of important goods such as wheat, corn, nickel, copper, oil and gas. Shortages of these goods increased their prices, adding further fuel to inflation. This in turn has made the path for central banks even more challenging.

What's Next?

These key developments are likely to continue impacting the market this year.

During a recent interview with MoneyTalk, Sid Vaidya, TD's Chief Investment Strategist for U.S. Wealth, noted that inflation is expected to remain elevated. Sid also commented on the market implications of the war in Ukraine stating that "The longer the war continues, the greater the impact on global economic growth."

He explained that even though the U.S. is more insulated from the effects of the war, since our trading relationships with Russia and Ukraine are limited, we will still be indirectly impacted through higher commodity prices and a global slowdown in growth.

As the war in Ukraine creates further inflationary pressures, all eyes will be on the Fed. Sid voices TD Wealth's view for the federal funds rate this year stating that rates are expected to reach 1.75% by year end. "Future Fed actions and the specific path they take in tightening policy will be the largest factor for U.S. investors" Sid emphasized.

Portfolio Positioning

Though the current market environment is complex, investors should not lose sight of their long-term investment goals.

There are positives in today's market; however, it is important to position portfolios correctly to help navigate the impending headwinds. On the positive side, Sid noted that "U.S. corporations are expected to deliver positive earnings growth [this year]." U.S. equities are expected to fare better than international stocks, and a tilt towards dividend growth stocks and higher quality companies with proven earnings and cash flow growth is recommended.

In the fixed income market, investors may benefit from an active management approach to capitalize on any opportunities that may arise from a readjustment in bond prices.

Most importantly though, Sid emphasizes that investors should "not be disheartened with the recent volatility or shorter-term performance. Focus on the achievement of your longer-term goals through a diversified portfolio."

Those who remain invested in times of market uncertainty tend to reap the rewards in the longer-term, Sid said.

This article is for informational purposes only, and its information should not be construed as legal, tax, investment, financial, or other advice. The information provided is general and does not address the circumstances of any particular individual or entity.

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