Ep. 50: Is Inflation Coming?!
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Welcome back to Money Matter where I help guide you in becoming a better and more confident investor! This gradual process of the US achieving herd immunity matched with the vaccinations will only add strength behind the argument of getting this economy back to neutral with recharging the service sector and get consumers out of their homes spending money for more momentum in this economic rebound. As we continue to see the macroeconomic backdrop improve, people are becoming concerned that inflation concerns will start taking center stage. So in this video, I would like to touch on some insights on how to position your portfolio with these early signs of inflation possibly coming our way these months ahead.
We are starting to see markets react – as in they’re starting to price in an uptick in future inflation as we continue to see breakeven inflation move to multi-year highs. This is brought on by record money supply growth, surging commodity prices, widening fiscal deficit, and supply chain bottlenecks. Don’t be fooled. These are all good signs! It’s showing a sign that the economy is coming back from the depths of the pandemic where prices were driven lower back in March and April. And when looking at the minutes from the Federal Open Market Committee back in January they stated that the economy is “far from the committee’s longer-term goals’’. This is another indication that the fed it’s going to change its monetary policy stance and therefore will most likely not entertain raising interest rates until 2023 at the earliest. Which Jerome Powel already discussed.
With rates being this low, as always it leads to speculation, which we are seeing a lot of with all the IPOs, SPACs, Bitcoin, and Reddit trading fiascos. Yet with equity markets being near record highs, my team and I remain optimistic and focused on the long-term growth cycle. This current bull market is coming up on its one-year anniversary, otherwise known as the depths of the pandemic recession. The average bull market lasts about 6 years. With the wind at our back, we are coming off both strong fiscal monetary policy which is looking to push us into our best year of economic growth since 2000, with a GDP forecast of 4% paired with the best earnings growth of 27% since 2009.
People see inflation indicators bring this equities party to an end. Which we don’t see it going that way. When you look at how the S&P 500 performs under varying levels of core inflation, equities performed above average in an environment where core inflation was between 1-4%. This gives us some room yet to run, with inflation increasing with the possible rise of interest rates. These inflation levels are generally considered healthy when they coincide with improving economic activity. Remember that the public companies that make up these indexes have the pricing power where they can raise their prices while simultaneously benefitting from productivity and technology efficiencies which help boost earnings growth. Which let’s not forget this pandemic has caused a lot of pain, but what it’s also done is to make companies more efficient.
Given the core-inflation estimates to be about 2%, Raymond James has analyzed the performance of the S&P 500 sectors when core inflation falls between the range of 1-3%. Since 1990 the average performance relative to the S&P 500 on a year-over-year basis has been strongest for the technology, health care, and consumer discretionary sectors with an outperformance of 6.8%, 2.3%, and 2% respectively. All three sectors are possible investment opportunities for you to consider.
With interest rates increasing for all the right reasons, eluding to economic growth and a healthy rise in inflation we are seeing the 10-year treasury yield go to its highest level since last February right before the pandemic hit. Sector performance is always going to be sensitive to a rise in yields as more equity investments are. And of course, a rise in rates causes a drop in bond prices with their inverse relationship. Be patient and look for opportunities in sectors higher dividend-yielding sectors such as utilities, real estate, and consumer staples are they tend to outperform.
If you’re looking for financial guidance and aren’t sure where to start, or when to get into that market please feel free to give me a call as I’m here to help. Thank you for watching and as always thank you for giving your finances that attention that they deserve!
