By John Drachman
As Memorial Day holiday goers left work early last Friday, the S&P 500’s inflation-defying fourth straight month of advances went practically unnoticed. Even though inflation is moving at its fastest clip since 2008, the equity markets keep going up. Inflationary fears may be unwarranted. “A 4.2% inflation rate?” asks Brian Jacobsen, a senior investment strategist, at Wells Fargo Asset Management. “Put a 1 in front of that number and then maybe I’ll worry. Don’t wake me until it’s 14.2%.”
According to Stan Choe, Associated Press, “Adding to the fog of the inflation debate — and the uncertainty that has markets churning — is that more than a generation has passed on Wall Street since investors had any experience at all with high, long-lasting inflation.” Such ignorance may be bliss for millennials whose oldest members were born during the Reagan Era’s generally benign 2% inflationary range.
Many investment-minded boomers in contrast are still scarred from year zero, 1974, when the S&P 500 tumbled 29.7% while inflation soared to 12.1%. The sell-off however was short-lived as the S&P 500 surged past 31.5% by year-end 1975.
Whether a threat or paper tiger, inflation always accompanies expansionary periods like the present. Fortunately, for mass affluent investors there are ways to profit from both sides of the equation: Hedging against inflation while still investing opportunistically to stay ahead of the pack.
- Keep the Lights On: Even when the markets go down you still need electricity and water. Accordingly, mutual funds like Fidelity Select Utilities PortfolioFSUTX look for capital appreciation in common stocks of companies generating most of their revenues from utility operations.
- Simply Precious: Real assets like gold are often the least speculative. Invesco Gold & Special Minerals Fund Class Y OGMYX seeks out capital appreciation from common stocks of companies engaged in mining, processing or dealing in gold or other metals or minerals.
- The REIT Stuff: Real estate often appreciates as inflation increases unlike many other financial assets. Accordingly, it may pay to have a diversified Real Estate Investment Trust (REIT) as a counterpoint to more aggressive investment strategies.
- What is in a Meme: Many stocks have proven fairly inflation resistant. Other more speculative opportunities may benefit from the market’s inflationary heat. For example, driven by social media hype and not company fundamentals, meme stock trading volume is soaring. “A dizzying run for meme stocks concluded (last week before Memorial Day),” according to Caitlin Ostroff of Dow Jones. “AMC Entertainment jumped more than 26% on Friday, continuing a string of double-digit gains that sent it to the highest close in four years on Thursday. GameStop gained 1.6% and Express rose around 13%.”
The Bottom Line
Inflation as short-term threat has not proven to be a long-term match for the underlying growth dynamics of the American economy. When you craft your own inflation approach, speaking with a financial advisor now can pay dividends later. Importantly, an advisor can also help ensure your strategy syncs up with your long-term financial goals.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.