My Inflation Playbook
Inflation has returned. I haven't factored in the effects of inflation on portfolios for almost ten years. However, like the famous line from The Terminator, "I’ll be back." Lumber is up 200%. If you have filled your car up lately, you have noticed an increase.
Here are several of the contributing factors to our inflation.
- The massive fiscal stimulus bill from the Biden administration targeted those with a higher marginal propensity to consume.
- A vaccine rollout with new pharmaceutical solutions and distribution improvements will accelerate the economy with increasing demand.
- The Federal Reserve's new policy framework encourages commerce, but lets inflation run above its target.
Rising inflation would be a new phenomenon for anyone who entered the wealth management industry in the last decade. Nine of the previous 11 years saw the consumer price index (CPI) growth end the year either lower than or equal to the level it started the year. The Fed failed to achieve its 2% inflation target, despite some innovative policies.
From a multi-asset portfolio standpoint, the deflationary playbook was simple, in hindsight — own the growth. Companies that could sustain revenue growth without cyclical leverage to the global economy saw a massive price appreciation in the post-financial crisis area.
Now that the Fed is implementing its new policy framework, we believe investors need to dust off a completely different playbook: how to position themselves for rising inflation.
Commodities do well during inflation but suffer during deflation. Our commodity portfolio is up 60% over the last year. Typically, commodities average 12.3% per year. Emerging markets also do well during the acceleration period of inflation.
Diversification is the key to performance and risk management. What hot is hot, what is not. Like Jim Cramer says, “There is always a bull market somewhere."
We incorporate a specialized program that can both assess the risk in your portfolio and give you historical information on the portfolio in order to discover the effects of inflation on your current portfolio.
The landscape has changed. Inflation’s rising rates and tax increases will affect the way portfolios should be constructed. Get in touch with Riley Private Client today, so we can help you navigate inflation and how it affects your portfolio. You can fill out your risk assessment here.
