How to invest during inflation

The news on inflation has been bad for months, but recently it has gotten worse. On Wednesday, the government reported that in June the consumer price index rose at an annual rate of 9.1 percent, the fastest pace since November 1981.

This dire news adds to considerable pressure on the Federal Reserve to control inflation. The Fed is trying, raising short-term interest rates and selling its own securities 8.9 trillion dollars balance sheet

But these are blunt instruments. While they can reduce inflation, they do so by slowing the economy. This increases the chances that the United States will experience a recession, a word that is being bandied about Often with “fear” in headlines and in analyzes of the economy.

Some of these fears are clearly justified. Add the current rise in the coronavirus, Russia’s war in Ukraine, and the still-high level of global energy prices to these problems, and you have a recipe for economic trouble, to say the least.

Millions will no doubt experience pain, if the slowdown is bad enough to qualify as a recession: job losses and dashed dreams always accompany broad declines.

If you’re lucky enough to have the financial resources to invest in stocks or bonds, the next few months can be tough, but you can get through them with a little planning.

Readers have been asking for advice and I’ll try to help. Don’t get your hopes up, though. I don’t know where the markets or the economy are headed in the short term. Nor anyone else. As inconvenient as it is, we have to continue not knowing.

The future is never entirely clear, but for now, it’s a matter of pure guesswork.

Long-term investors may be better off ignoring the news — if ever there was a time to do so, this is it — because even a detailed study of incoming economic and financial data fails to provide useful guidance.

As Paul Krugman put it in a newsletter this week: “The different pieces of information we have don’t seem to line up.” He added: “Some data suggest a weakened economy, perhaps even on the brink of recession. Some suggest a still strong economy. Some data suggest very tight labor markets; some, not so much.”

8 signs that the economy is losing steam

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Worrying prospect. Amid persistently high inflation, rising consumer prices and declining spending, the US economy is showing clear signs of slowing, fueling concerns about a possible recession. Here are eight other measures that signal trouble ahead:

Consumer confidence. In June, the University of Michigan survey of consumer sentiment hit its lowest level in its 70-year history, with nearly half of respondents saying inflation is eroding their standard of living.

The housing market. Demand for real estate has declined and new home construction is slowing. Those trends could continue as interest rates rise and real estate firms, including Compass and Redfin, have laid off employees in anticipation of a housing market downturn.

copper A commodity seen by analysts as a gauge of sentiment about the global economy because of its widespread use in buildings, cars and other products, copper has fallen more than 20 percent since January, hitting a low of 17 months on July 1.

oil Crude oil prices have risen this year, partly due to supply constraints stemming from Russia’s invasion of Ukraine, but have recently begun to falter as investors worry about growth.

The bond market. Long-term interest rates on government bonds have fallen below short-term rates, an unusual occurrence that traders call a yield curve inversion. It suggests that bond investors are expecting an economic slowdown.

Stock, bond and commodity markets are also opaque. While stocks and bonds have taken a beating this year, commodities like oil, wheat and copper have rallied in value, but the exceptions to that statement are glaring.

Stocks haven’t been down much lately, bond prices have recently risen (as yields, which move in the opposite direction, have fallen), and oil prices have come off their recent peaks.

What is the trend for the next six months? There are many answers but, deep down, no one knows.

The Fed is in a difficult position.

“The Federal Reserve System has been given a double mandate,” said the Federal Reserve Bank of St he says, “pursuing the economic objectives of maximum employment and price stability”. These goals are now in conflict.

Price stability has become the Fed’s main concern. The recent inflation report makes interest rate hikes almost inevitable.

At the same time, the U.S. unemployment rate was 3.6 percent in June, not far from its lowest level in decades. But the country has not achieved “maximum employment”. Many people have chosen not to work, or have been unable to, due to issues such as lack of childcare or concerns about exposure to the coronavirus. With rapid economic growth, one would expect many more people to join the workforce. But that’s not likely to happen now.

The Fed has begun tightening financial conditions to reduce the surge in demand for goods and services that helped spur inflation, which is another way of saying it is deliberately slowing the economy.

The Fed funds rate, which it directly controls, has already risen from near zero to its current range of 1.5 to 1.75 percent, and financial markets to predict which will continue to increase to 3.57 percent in March.

At that point, the Fed may have to start cutting rates, at least the markets think so. But why? One possibility is that inflation will moderate, so the Fed can refocus on ensuring maximum employment.

However, it is also quite possible that the Fed will not be able to curb inflation without causing a recession. It’s also conceivable that inflation will largely subside on its own, as supply chain problems caused by the coronavirus and war ease, making interest rate hikes unnecessarily punitive for workers. Oil prices have fallen recently, for example, and gas prices have followed, although they are still high.

I’ve been saying since April that inflation may be nearing its peak, and it’s possible that that premature claim may actually be true now.

Job gains in July, which far exceeded expectations, show that the labor market is not slowing despite the Federal Reserve’s efforts to cool the economy.

But don’t count on it.

What is clear is that the Fed has no real choice: inflation is such a hot-button political issue that the Fed must be seen to be acting to control it, even though its actions certainly increase the risk of recession

Markets are supposed to be forward-looking, and a bear market in stocks (a decline of at least 20 percent from the market’s peak) is taking place.

But I’ve looked at the timeline of bear and bull markets for the S&P 500, along with recessions since 1929, as defined by the National Bureau of Economic Research.

The words of the great economist Paul Samuelson, written in Newsweek in 1966, are still mostly true: “Wall Street indexes predicted nine of the last five recessions.” By my own generous count, the S&P 500 has predicted seven of the last 16 recessions. That would be a great batting average in baseball (.440, or 44 percent), but on its own, it’s as useless as a crystal ball.

The S&P 500 serves as one of 10 factors used by the Conference Board, an independent business think tank, to formulate its Leading economic index. The index has forecast “slow growth” but, so far, not a recession. Two other indices, covering current and lagging indicators, show robust growth.

What this boils down to, once again, is that we are in the dark.

The implications of these increased but uncertain risks are simple.

Making sure you can pay your bills and have enough cash for emergencies is crucial. Keep your cash in a safe place and preferably one that provides a small return. Reasonable choices include high-yield bank accounts, money market funds, Treasuries and I-bonds.

After that, if you’re just starting out as an investor and have decades ahead of you, take the long view. Put your money into diversified, low-cost index funds, including workplace target date funds, which track the entire stock market. Add diversified bond index funds as you get older.

For people with shorter horizons, the situation is more complicated. You may have to make some trade-offs.

If the economy fell into a prolonged and deep recession, the stock market could fall further and not recover for some time. Preparing for this eventuality may mean reducing your stock allocation, even now, after the market has fallen, if you need to use the money soon.

Although bonds have underperformed recently and are long-term laggards, high-quality bonds are generally safer than stocks. That is why they are suitable for reducing risk.

I started my career in the 1970s and I reluctantly accept that I am closer to the end than the beginning. About 40 percent of my portfolio is in bonds, more than I had 20 years ago and less than I expect in the future. After decades in stocks, gradually switching to bonds and locking in some of those gains is a comfort.

Find the mix of diversified stock and bond funds that’s right for you, depending on where you are in life. Economic news can be dire, but with a little luck and a lot of planning, you can get through it.



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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!