You’ve probably seen headlines or heard pundits mention inflation a time or two over the last few weeks. At its foundation, inflation occurs when prices rise while goods and services remain consistent. The passage of yet another stimulus bill equates to more money being sent to many consumers, which should help the economy continue the economic recovery started in the latter half of 2020. Many observers believe that this could lead to an overheated economy, which has historically raised both inflation and interest rates. It should be noted that neither the Federal Reserve nor the current Treasury Secretary, Janet Yellen, appear overly concerned about rampant inflation. The jury is out as to what will actually happen.
A few thoughts for clients/investors:
- Equities tend to perform better than fixed income when inflation rises over a period of time. The thought is that you own stock in a company that has the ability to raise prices to cover its rising costs; thus allowing the company to continue to increase earnings and cash flow.
- In the short term, inflation and interest rates are negative for fixed income investors. The flip side of that is that as bonds mature, they will be invested at higher rates. Many savers would like to see higher interest rates than the current historically low rates. To hedge against the risk of rapidly increasing rates, we are tilting our fixed income positions towards shorter maturities.
- For conservative investors, an allocation to TIPs (Treasury Inflation Protected Securities) may help to hedge against increases in the inflation rate.
We are constantly reviewing the economy and potential impacts to our portfolios. Please reach out to us with any questions you may have around inflation and our investment strategy.
Matt and Andrew