Don't Be Thrown Off Base

We do not want any of our clients to think we are not taking a resurgence in inflation seriously – we are.  Runaway inflation would damage the economy and the stock and bond markets. 

As of now, we believe runaway inflation is not the most likely outcome as secular, deflationary trends will most likely remain in place and inflation will most likely settle in at the 2%, or less, level once we start to compare prices in 2022 to prices in 2021.

So, what is an investor to do?  What types of investments tend to do well if inflation picks up and overshoots the Federal Reserve’s expectations?  Commodities, health care, real estate, and consumer staples generally perform well.  As interest rates rise back to more normal levels, we believe financial stocks could outperform as well.  Technology stocks typically suffer as do long-term bonds.  While we are not forecasting runaway inflation, we do believe the trend in interest rates and inflation will be upward over the next several years. Because of this, we reduced the duration of most of our bond portfolios (favoring short-term bonds and cash and reducing exposure to intermediate and long-term bonds) and increased the use of some alternatives (covered call strategies are low-volatility strategies) that have little to no interest rate (inflation) risk.

If you have been a client for more than 12 months, you know that our mantra is we strive to stay balanced and diversified and we design portfolios to help our clients achieve their long-term objectives in every type of market environment.  The next time you hear or read something about the newest GDP growth or inflation numbers, take a moment to reflect on the base effect – what is the time frame that the numbers are being compared to?  What was going on during that period of time?  Remember, many headlines are created to draw attention and many people who are the most vocal about runaway inflation may just be trying to benefit themselves (selling gold, Bitcoin, annuities, etc.).