The stock market is on a tear – continually breaking all-time highs since the beginning of the year.
But, unfortunately, the massive trading volume is keeping the cats on Wall Street flat. They want to keep this gravy train going as long as possible, but there’s a significant threat looming on the horizon – inflation.
“The biggest ‘inflation scare’ in 40 years is coming — what stock-market investors need to know.” –MarketWatch, April 10, 2021
Inflation is here, and Wall Street doesn’t want to draw attention to it because inflation is bad for business.
“Inflation is rising, and so are investors’ fears about stocks.” –MarketWatch, February 20, 2021
In the year-ended March; the CPI (Consumer Price Index) jumped 2.6%, the biggest 12-month increase since August 2018. In general, the CPI is a widely used monitor of inflation that measures the rate at which prices for certain products have increased over a period of time. Specifically, the CPI measures the price increases for a basket of products and services – including food, gas, energy, utilities, clothes, automobiles, transportation, and medical services.
Inflation is a widely monitored economic indicator that can significantly impact the economy if it enters hyperinflation or deflation territory.
Why is inflation frowned upon?
Because it erodes your buying power and your earnings. Everything from diapers to donuts to toilet paper could all get more expensive – making every dollar you earn worth less and less and putting financial stress on families already struggling to get by.
Why does inflation scare investors?
Just as inflation erodes buying power, it also erodes portfolios because of the impact on businesses. As the price of goods and services rises, consumers buy fewer goods and services, and as a result, revenues and profits decline. As revenues and profits decline, stocks take a hit, and the economy slows until inflation eases.
Historically, the Fed has stepped in to combat inflation by increasing interest rates to cool the economy until inflation was reined in temporarily. However, the Fed announced recently that as a general policy moving forward, it would not intervene and allow inflation to hover at certain levels in order to keep interest rates low and allow for the economy to keep humming.
In its announcement, the Fed explained that it would begin placing more emphasis on boosting employment and allowing inflation to rise above its long-standing target of 2% target during economic expansions, keeping rates lower for longer. As a result, it indicated it would likely keep rates low for the next five years.
The problem with the Fed’s policy is that investors don’t often follow their heads when it comes to inflation. So if they see and hear about inflation, whether it’s controlled at manageable levels or not, their investment brains will always trigger “sell!”
Stocks are already overpriced, and the fear of inflation is just one more factor that could trigger a sell-off in the markets. It’s not what Wall Street wants you to know because it’s not in its best interest.
As an investor, is your portfolio shielded from inflation?
What kind of assets are in your investment portfolio?
Assets that will diminish with inflation like stocks and bonds or ones that will keep pace like tangible assets that offer products and services with prices that keep pace with inflation and with underlying values that will appreciate with inflation as well?
