Put that champagne and fizz back in the bottle.
The worst may not be over.
But you knew that already… as did we.
Now we have the official word from the Federal Reserve.
Turns out, all those thoughts about “beating inflation” and lower interest rates were somewhat premature.
So get ready for higher rates for longer.
Below, we’ll share our thoughts on what you can do to plan for that. But first, how’d the markets fare today?
Market Data
The S&P 500 closed up 0.1% to end the day at 4,981.80… the NASDAQ fell 0.3% to close at 15,580.87.
In commodities, West Texas Intermediate crude oil trades at $78, down 27 cents…
Gold is $2,034 per troy ounce, down $1…
And bitcoin is $51,296, down $724 since yesterday.
And now, back to our story…
Better Than Gold?
As the Financial Times reports:
Federal Reserve officials remained “highly attentive” to inflation risks and wary of cutting interest rates too quickly, according to the minutes of its January meeting, pouring more cold water on market expectations for an easing of monetary policy as soon as March.
Fed officials are right to be “highly attentive” to inflation.
Better late than never.
Of course, we probably can’t even blame most of them for being late to the inflation “party”.
For years they’ve forced themselves to believe that deflation was the great enemy of the people… and that inflation was a friendly old grandpa who wouldn’t harm anyone.
Sometimes it’s the friendly ones you need to watch the most!
And it turns out it’s taking longer than expected to get that inflation rate down.
You can see that on the chart below (white line). We’ve also added a line (orange) for the Federal Funds Rate, the Fed’s main interest rate:
Source: Bloomberg
So what do we make of that?
On the plus side, there are plenty of times when the Fed has cut rates prior to inflation falling. You can see instances of the orange line (Fed Funds Rate) begins to fall before the white line (inflation) follows.
However…
It’s also true to say that the market and economy hadn’t experienced such a long period of close-to-zero interest rates as we’ve seen from 2008 onwards.
In the past, as inflation ebbed and flowed, interest rates ebbed and flowed. Yes, supply shocks here and there (such as in the 1970s) created havoc.
But as you can see from the chart, there was a corresponding reaction with interest rates.
This time, the Fed was so fearful of deflation and so overconfident in itself that it let the current bout of inflation get totally out of control.
To the extent that it’s still out of control. The fact that Fed officials are worried about the potential for another inflation spike proves that.
In which case, if we had to put money on it, we’d put it on the 3% inflation level becoming the effective “2% target” of the past.
You know what that means…
Higher prices at a quicker rate. And while it may not seem much of a difference, it is a difference.
Check out the table below. We show a starting value of $1,000. We then show you the purchasing power of that $1,000 over time using 2% and 3% inflation.
Note the difference after 10 years and 15 years.
In 10 years, your $1,000 purchasing power today falls to just $834 assuming a 2% inflation rate. Assuming a constant 3% inflation rate, your purchasing power is just $760.
Roll out to 15 years, and it’s $754 against $653.
This shows you the dangerous nature of inflation once the government and central bank let it (or allow it to) get out of control.
The solution? The obvious answers are gold and Bitcoin. We hear those solutions all the time.
But to our mind, the solution has to include stocks too. All too often the gold bugs and macro folks do the right thing by warning you about inflation… but then they tell you to sell stocks!
That’s terrible advice.
In our view, and the evidence will back it up, a stock portfolio is the single best inflation-beater you can get.
Specifically, economically durable stocks (remember those “necessities” and “habits” stocks we wrote about last week?)… companies that have a product or service in constant demand.
Companies that can relatively easily replenish their stock of product (energy companies aren’t always the best for this)…
And companies that continue to throw off cash flow, usually in the form of dividends, over the long term.
Because in any inflationary environment, it’s the cash flow you can generate from your investments that will be the most useful.
Gold is great. Everyone should own it as a good capital base. But for ongoing growth, and the ability to reinvest the cashflow if you can, you’ll always find that stocks are your best bet when inflation is running wild.
We’ll be back tomorrow to share some individual stock ideas.
More Markets
Today’s top gaining ETFs…
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Invesco Energy Exploration & Production ETF (PXE) +2.8%
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iShares U.S. Oil & Gas Exploration & Production ETF (IEO) +2.8%
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First Trust Nasdaq Oil & Gas ETF (FTXN) +2.4%
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Tortoise North American Pipeline Fund (TPYP) +2.1%
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Global X MLP & Energy Infrastructure ETF (MLPX) +2.1%
Today’s biggest losing ETFs…
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First Trust NASDAQ Cybersecurity ETF (CIBR) -5%
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Invesco Dorsey Wright Technology Momentum ETF (PTF) -2.9%
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Amplify Transformational Data Sharing ETF (BLOK) -2.7%
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First Trust Technology AlphaDEX Fund (FXL) -2.1%
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Siren Nasdaq NexGen Economy ETF (BLCN) -1.9%
Cheers,
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Kris Sayce
Editor, The Daily Cut