As I have been writing in our monthly update, The Seven signs of a Changing Economy™, since last summer, inflation is baked into the Covid bailout cake, as all the money (TRILLIONS) went directly into our pockets. That is now being spent and the result is what economist call cost/push inflation.
In a simple example, that just suggests we all want to buy the same house and the supply and demand equation requires the price to increase until demand slows. I have said to expect 3-5% inflation for the next several years starting in 1Q2021, i.e., now. A great picture of what is coming can be seen in M-2 Money Supply. Search online for “St. Louis Federal Reserve M-2” and there it is: inflation looking right back at you!
There are many things that perform very well during inflationary periods. Many of us have experienced this from living in the early 1980’s. A few are energy, real estate, farmland, input commodities, healthcare (inflation proof) and surprising to most people ownership in Corporate America. Stocks, depending on sector, tend to do well in inflationary periods, as they simply pass the cost increase on to you and me.
At the WSG we have been planning forward for this in our client asset allocations. When you review your statements this month, you will notice very nice profits in your energy positions, commodities, and health care.
What gets slaughtered by inflation is bonds. With rare exceptions we hold none.
It is so easy to type about these changes now that it is becoming obvious, but last summer and fall when I was pulling the trigger it made me a touch nauseous. No one knows the future, but I am confident that we have made some good decisions in our client asset allocations and investment positions based on all the homework done prior to changes.
There will be bumps in the road ahead, but volatility is the price we pay to be investors. As I like to remind myself during times like this, volatility is not risk. Risk is changing the plan because of some outside influence, like a news item or event, that will evaporate into time, like they tend to do.
We remain focused on planning around each of our clients’ constraints for time, risk, and volatility.
Please feel welcome to call, email or stop by the office with any questions, comments, or observations.
Jim Lunney, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.