If It’s Not One Thing, It’s Another – Don’t Let Inflation Fears Derail You
By Andrea Bereznak
The financial markets have zoomed back toward peak levels, additional government stimulus is flowing, and the Federal Reserve has promised continued easy monetary policy. Beginning signs of herd immunity are showing as vaccinations rollout and higher numbers of Americans have contracted and recovered from COVID-19.
All this leads to increasing consumer and business sentiment and expectations for above trend growth….. as well as the creeping worry that inflation may be coming.
Here is what you need to know and how to respond to stay on track in your own investment portfolio.
Inflation is Normal, and Desirable, to a Point
Headline inflation correlates with corporate sales and profit growth. This means a recovery in inflation also signals an improving U.S. economy. Media headlines suggest a bleak outlook for individuals, and yes, there is significant disparity among economic sectors. However, personal income data shows us that in aggregate, employment income levels have recovered significantly. Income overall is only down ~1-2% from pre-pandemic levels. When we include stimulus related transfer payments (excluding the newest wave), personal income is rising to a new record high.
Market Interest Rates Are Rising
Inflation expectations caused the 10-year U.S Treasury nominal interest rate increased from 0.93% at the end of 2020 to 1.43% by the end of February, an increase of 0.5%. Real rates, measured by 10-year Treasury TIPS, increased 0.35% over the same period.
Financial Markets are pricing in a sooner than proclaimed rate hike by the Federal Reserve, despite the Fed’s signals to the contrary. The rise in real rates we saw toward the end of February do suggest that the Federal Reserve may need to begin tapering their bond purchases sooner than originally planned.
High Inflation can cause Market Jitters
As seen over the past 2 months, inflation concerns, just like any other negative sentiment, can provoke volatility in financial markets. While modest and consistent inflation is a sign of a growing economy, when interest rates rise quickly it can be destabilizing.
This isn’t our First Rodeo
Inflation should prove to be a cyclical issue, not a structural risk. Returning demand for services as the economy reopens can create pockets of inflation, but those are less likely to translate into global price jumps. Headline inflation is less worrisome than core inflation. Historically headline inflation has transmitted to core inflation, but the lead time has been roughly 18 months. If history is a guide, we might not see a sustainable lift in core inflation until 2022 or 2023.
Consider Some Investment Portfolio Adjustments
Investors concerned about drooping bond prices and rising inflation should speak with their financial advisor about reallocation options that meet their specific situation and needs. Remaining in shorter duration positions and considering higher yield, floating rate credit, and or emerging market debt may make sense for some investors. Regarding equities, sector rotation along with the business cycle would suggest that cyclical industries remain attractive.
Each investor’s situation is unique. If you have questions about how to position your portfolio for future inflation, call us at (480) 507-2425 or contact us online. We'd be happy to review your personal circumstances.
The content in this article was prepared by the article’s author. Cetera Advisor Networks, LLC does not endorse its content, and the views expressed may not necessarily reflect those held by Cetera Advisor Networks, LLC.