Some folks have been stating this will be the “Summer of Love”, while others (the geeky ones) have been stating this summer will go down in the history books as the “Summer of Inflation”. But the real question is really if inflation is here to stay? A song comes to mind “Should I Stay or Should I Go Now” by the Clash in 1982.
Perhaps they penned the song about the unprecedented levels of inflation and interest rates during the 70’s? I was too young then to recall the mile-long lines at gas stations nor the staggering interest rates impacting home loans, but much has been written about it. As I assess current market volatility and speaking with my clients about their concerns, inflation is definitely top-of-mind for most. But is inflation really here to stay or is it simply a short-term result of stimulus monies and easy Federal Reserve monetary policy to combat the intense economic impact the pandemic has caused?
As Liz Ann Sonders rightfully pointed out in her recent article “World of Inflation”, the definition of transitory is defined as non-permanent and therefore even the stagflation of the 70’s was ‘transitory’ by definition. Yet the answer for us consumers and individual investors is if inflation will continue to persist and what does that mean for us regarding our budgets and investable assets?
The Federal Reserve is of the opinion that our current pace of inflation is temporary and therefore not of a major concern to combat it. They have stated repeatedly they will ‘taper’ the bond purchasing sometime soon (purchasing of bonds in the open markets, brings overall bond prices down and yields up, aka ‘quantitative easing’). Easy monetary policy has fueled the flames for rising equities, in particular home prices.
Typically, any high-risk assets, or companies with relatively high valuations are more sensitive to inflationary pressures. In particular, convertible bonds, preferred stocks, and high-yield bonds performed the best along with lower-valuation companies, or value vs. growth. Technology companies tend to suffer as they are more dependent upon financing for future growth than earnings, like value stocks.
So the question is how do you invest your money? Since we do not know if inflation is here to stay or will go, the answer is through diversification. Build out a portfolio that spans across all asset classes and sectors, including international to further diversify upon currencies.
If you are in the market and want an unbiased opinion of your current investments without any pressure to take over management of your assets, please reach out. I would love the opportunity to help you make some key tactical changes to your portfolio.