Temporary disruption or seismic shift?


Equity Market Perspectives for the First Quarter of 2022

By Haruki Toyama, Director of Research, Portfolio Manager, Analyst


Over 15 months ago, in one of our year-end letters summarizing 2020, we mentioned how so many events were packed into the year; it felt like we experienced a decade’s worth of macro-economic and geopolitical events in one year, including but not limited to, a pandemic, 1960s-style social unrest, a disputed political contest, and extremely volatile stock markets. To that list, we can now add a war involving a major global power.

The question today is what, if any, long-lasting effects this most recent development will have. The inflationary supply shock engendered by Covid was already turning out to be more persistent than most had predicted. The war in Ukraine is exacerbating the shock. If other countries are pulled deeper into the conflict, there will undoubtedly be even further disruption of global trade and supply. As sharp as the direct disruption of an expanded conflict might be, we would view it as relatively temporary in the sense that once the conflict ends, the direct impacts will eventually fade.

The world may be flat, but geopolitical earthquakes may create deep canyons.

However, some of the new economic and political fault lines that are being drawn – the term du jour is “deglobalization” – will have repercussions that might well last many years beyond the end of the war. For some time now, pundits have discussed the possibility that China may expand its “walled garden” beyond the internet and into other spheres of life and economic activity. We must now consider the scenario that the walled garden may include many other countries alongside China; such an economic bloc might include Russia, part of the Middle East, part of Africa, and possibly even India or larger parts of South Asia. That would encompass well over 3 billion people out of the global population of 8 billion. As yet, it’s way too early to even begin to think what the odds may be of such a radical re-alignment of commercial, political, and social linkages. But we can no longer easily dismiss the possibility. The world may be flat, but geopolitical earthquakes may create deep canyons.

The tables of inflation have turned

One of the potential outcomes of such a shifting of the tectonic plates might be a sustained period of higher inflation than we’ve experienced in the recent past. Milton Friedman said that “inflation is always and everywhere a monetary phenomenon.” While this may be true in a sense, most economists would agree that globalization was a major force in the disinflationary environment of the past three decades. If that is true, then it seems to make sense that the converse must be true – that deglobalization should result in an inflationary environment.

As you know, we are reluctant to predict the specific macroeconomic outcomes of theoretical geopolitical events. The way we deal with this uncertainty as a steward of your hard-earned money is to construct all-weather portfolios by investing in a diversified collection of all-weather companies and avoiding tail risks. We rarely trade or try to change en masse our portfolios’ “positioning” because of general events; that continued to be the case this past quarter, although we did trim or sell a few investments to keep our aggregate risks in check. We chose not to rapidly re-invest the proceeds; instead, waiting until the “aha” moment strikes us with the many companies in our on-deck circle.


“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”), which also includes the Madison Scottsdale office. MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.

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