Streetwise for Friday, July 16, 2021

As discussed to in this column several times recently, the issue of inflation is being deliberated ad nauseum by a host of analysts and economists as well as the Fed as they try to deal with a crucial question: How can investors and citizenry in general protect their portfolios and themselves if inflation persists?

Jerome H. Powell, the Federal Reserve chair, was pointed in his comments that inflation flared this spring, and in June. "Inflation could turn out to be higher and more persistent than we expect," he said.

Furthermore, Fed officials now allow that interest rates might need to rise sooner than anticipated last year. Top that end, they have begun discussing when to start tapering their $120 billion in monthly bond purchases.

On the other hand, much of the recent surge in prices can be linked to the economic recovery from the pandemic. Therefore, the situation a year or two from now cannot be predicted reliably. It may all turn out to be "transitory," as the Fed has maintained.

Even if you are worried about inflation, keep in mind that over long periods of time, diversified portfolios are likely to be the best investment approach. If you can afford to wait it out, one reasonable approach to inflation is just to ignore it.

Historically, equities did not decline during the last prolonged period of inflation, from 1973-1979. However, they also lagged a bit behind annual inflationary price increases of 8.8 percent. Large-cap stocks gained 3.26 percent a year during that period, according to Morningstar.

If not stocks, what about certificates of deposit and savings accounts. They are currently paying exceptionally low yields because of the current low interest rate environment.

If an inflationary environment brings with it higher interest rates, then CDs will likely offer more appealing returns. However, history shows that those willing to take on a degree of market risk that is associated with equity investing, will likely find that to be a better solution during times of inflation.

For many investment advisers, the outlook for stocks hinges on the outlook for inflation, which has been rising. The personal consumption expenditure (PCE) core price index, which is closely tracked by the Fed, rose 3.4 percent in the 12 months through May.

That is the steepest rise since 1991. Yet, the reopening of the economy is a major extenuating circumstance that prompts me to dismiss, in considerable part, the inflation risk. Furthermore, the markets and the economy continue to reap the benefits of the recovery from the pandemic and its associated recession.

For the most part, new cases of Covid-19 keep falling, and vaccinations, jobs and economic growth keep rising. So, it should be no surprise that the stock market has been rising, too.

With the equity markets at elevated valuations by many measures, you probably wonder when I continually conjure up a bright future in which economic and corporate results remain robust while inflation and the pandemic remain subdued. Nonetheless, that is what my models are forecasting.

Even so, the bears are not hibernating, have been alarmed by the ebullient mood found for the most part on Wall Street, as you might expect. And there is even a degree of uneasiness among neutral and even some bullish investors. Yet, as I see it, support for stocks remains broad, if maybe not as deep as some would like it.

Meanwhile, do not forget that President Biden has proposed $2 trillion in new infrastructure spending. That may create opportunities for such infrastructure stocks as electric utilities, builders of roads and bridges, and owners of railroads and cellular towers.

Whether you are cooking dinner, sitting in front of a computer, or driving on a road, you are using infrastructure. Pipelines providing natural gas, power lines transmitting electricity and roadways all count as infrastructure.

Whether your equities are in the infrastructure industry, or they own infrastructure assets, they themselves remain publicly traded equities and are likely to share in the trends of the broader markets."

Investors astute enough to see through the fog of disenchantment disbursed by some regarding both the markets and the economy, could find it beneficial.

Lauren Rudd is a Managing Director with Raymond James & Associates, Inc., member NYSE/SIPC. Contact him at 941-706-3449 or Lauren.Rudd@RaymondJames.com. All opinions are solely those of the author. This material is provided for informational purposes only, is not a recommendation and should not be relied on for investment decisions. Investing involves risk and you may incur a loss regardless of strategy selected. Past performance is no guarantee of future results.