Altering Your Investment Portfolio
During Times of Inflation
BY STEVE DINNEN
Inflation is upon us. It’s in our grocery cart. It’s on our restaurant tab. It’s in our airplane tickets. And it’s in our investment portfolio. Some companies can handle inflation well, while others perform poorly. Just as we can change our grocery buying habits a bit to blunt the impact of rising prices, we likewise can alter our investment portfolio to better glide it through an uncertain period of inflation. One action you might consider is to avoid REITs and energy pipelines that pay hefty dividends and attract investors because of that. “Dividend vehicles in rising rates get demolished,” said Kelly Flynn (pictured), founder and owner of Des Moines-based Prospective Value Partners. While there are no absolutes, higher-yielding stocks generally do not perform well in rising rate environments. Since they are "bond proxies," higher rates make them relatively less attractive as investment vehicles. On the other hand, Flynn said financials should do relatively well in a rising rate environment. “Banks' [interest rate] margins will expand, insurers will benefit from higher yields in their sizable bond portfolios,” he said. (Insurers typically hold bonds to their maturity, which avoids the problem of selling an existing bond into a rising interest rate market.) Flynn said that if we find ourselves in a sustained inflationary environment, companies with pricing power should outperform. Pricing power simply is the ability to raise prices without curbing sales. Flynn does not make any recommendations of what stocks have this clout, but in speaking with The Street, Ed Wolfe, of sell-side analyst Wolfe Research, ticked off a few that come from a wide variety of industries: drinks maker Constellation Brands, apparel company Ralph Lauren, medical device manufacturer Dexcom, and fast food giant McDonald's. Companies that are "stuck in the middle" with rising input costs but limited ability to raise prices should underperform. Value stocks perform better in high inflation periods and growth stocks perform better when inflation is low. Stocks tend to be more volatile when inflation is elevated.
Notwithstanding the above, Flynn said rising rates will be a headwind for the market as a whole. But overall he still favors stocks over bonds. Speaking of bonds for a moment–inflation is their worst enemy. That’s because inflation erodes the purchasing power of a bond's future cash flows. Typically, bonds are fixed-rate investments. If inflation is increasing, the return on a bond is reduced in real terms, meaning adjusted for inflation.
Does Yield Curve Inversion Mean a Recession is Coming?
BY STEVE DINNEN
The yield curve has inverted–again. Could we be heading toward a recession–again? The precise relationship between the fortunes of the economy and this rare reversal of how interest rates on Treasury securities function is matter of much debate. But the results are demonstrable: Since 1956 every single recession except one has been preceded by an inversion. Investors typically see that with Treasury securities, the longer the maturity (they run from four weeks to 30 years), the higher the interest rate will be for those far-off maturing bonds. But from time to time this is not the case, and shorter-term maturities will fetch higher rates than their long-term cousins. This is an inversion. Benchmarks for inversion watchers are the two-year Treasury bills and the 10-year Treasury bond, and indeed, they have flipped rates. There was an instance last month when the two-year Treasury yield was 2.337%, against 2.331% for the 10-year. Some economists are suggesting a recession awaits us in the not-so-distant future. Among their devices used to predict a downturn are unhealthy trends in employment, inflation and, yes, interest rates.
Inflation-Protected I Bonds Worth Considering
BY KATE DORE FOR CNBC.COM
Less risk often means lower returns. But that’s not the case with I bonds, an inflation-protected and government-backed asset, which may soon pay an estimated 9.62%.
I bonds currently offer 7.12% annual returns through April, and the rate may reach 9.62% in May based on the latest consumer price index data. Annual inflation grew by 8.5% in March, according to the U.S. Department of Labor.
“The 9.62% is an eye-watering number,” said certified financial planner Christopher Flis, founder of Resilient Asset Management in Memphis, Tennessee. “Especially given how other fixed-income assets have performed this year.” READ MORE.
Survey: Millennials Are Optimistic About Retirement
BY CHRISTY BIEBER FOR USATODAY.COM
The pandemic has brought about big changes for many Americans. Surprisingly, some of the financial shifts resulting from COVID-19 have actually been positive ones.
In fact, a recent AIG Survey called "Moving Forward: Planning for the Future in Changing Times" showed that one generation is now much more optimistic about their retirement prospects than in the past. And you may be surprised to discover which demographic group has changed its outlook for the better.
According to AIG's study, millennials are the Americans who have experienced the biggest positive shift in their view of retirement. A whopping 45% of millennial survey respondents said they now have a more positive outlook on their retirement prospects post-pandemic, compared with just 26% of Gen X members and 13% of baby boomers. READ MORE.
