I am very fortunate to get to teach young minds in classes at a local university. Philosophers have often said that your attitude and outlook on life reflects those who you spend your time with. Perspective is very hard to come by because it takes time and experiences to develop a view of the world around us. I cannot expect a student with very little experience in the finance and investment world to have a complete view of the financial world. We all tend to be lulled into certain biases based on near term events. When the markets are hitting new highs, we tend to feel euphoric and believe the only direction is up. When the markets get hit hard like they did in March and April of 2020 we tend to get shell-shocked and feel that the markets are doomed to move lower and that all is lost. History tells us that neither view is correct.
Most investors have not had to experience inflation like Americans did back in the 1970’s and early 1980’s. While the current inflation measures are still below normal, it is time to plan for a comeback. Inflation erodes away the purchasing power of your dollars. A family who lives on a fixed income is vulnerable to spikes in the cost of goods and services. We have witnessed significant price increases in real estate, vehicles, and many other consumer discretionary items. With large amounts of stimulus being pumped into the economy, the government wants Americans to spend. This will lead to inflation if demand outruns supply, which is what we are seeing currently in some areas.
Also consider the “buy American” movement that has been reborn with all the issues with our global supply chain. Globalization was a huge headwind for inflation because companies could farm out the manufacturing of a product overseas and make more profit. America has realized that our dependence on cheap labor and cheap products has come at a cost. Jobs and manufacturing are coming back to America which is good news for workers but bad news for the price of the goods and services they will produce. We believe inflation is on the horizon.
For our clients who have bonds in their portfolios, we can own different types of fixed income instruments that will fare better in an inflationary environment. The greatest hedge for inflation, we would argue, is still stocks. Several years back when interest rates bottomed out the first time in 2008-2011, we encouraged our clients to increase their allocations to stocks, especially higher quality and higher dividend yielders. This was a successful strategy. Although the Federal Reserve has stated their intentions to not move rates anytime soon, they might not have a choice if inflation rises significantly. Stocks are the silver bullet to tame inflation long-term, so we will continue to favor them despite the potential for increased volatility.