There is no doubt that economic data has shown warning signs, hinting of inflation. How has this impacted the markets? So far, equities seem to be faring strong, with no indication of changing. As of writing this, the S&P 500 sits just off of its record high. Inflation is a scary thought. We are constantly reminded of how inflation and hyperinflation can be devastating to an economy. Think of current day Venezuela. There are dollar bills sitting in the dumpster right now because of how invaluable their currency has become. The good news? The Federal Reserve claims that inflation is “transitory” and should be resolved in a matter of time. Slight price increases can be attributed to a variety of reasons: demand spikes due to reopening, supply-chain bottlenecks, and a labor market shortage just to name a few. The Fed has the tools to combat inflation should it deem action is necessary. Traditionally, here are some strategies that people have used in the past as a hedge against the inflation…
- Gold (The classic)
- Treasury Inflated Protection Securities (TIPS)
- Real Estate (Location, location, location)
I think it is reasonable to assume that there might be a slight pullback in equities if economic data continues its current trend. Unfortunately, interest rates are not exactly enticing. But, the 60/40 classic portfolio is also recommended during times of slight inflation. The US has seen inflationary periods of 5.4% in 1990, 3.84% in 2008, and consistent double-digit inflation in the 1970s and the S&P STILL managed to average a return of almost 10% since the 1920s. Chances are, all of this will blow over and equities will remain just fine.
As always, if you have any questions about your portfolio, reach out to TF.