Inflation Sensation – Stock Talk Podcast
I am Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. First off, the team at Oak Harvest appreciates your support and you tuning into our you-tube channel. If you like our content, please refer our channels to your friends and family.
We released our first half 2022 outlook, on December 3rd under the title “Curb your Enthusiasm Yields to a Bull Market Buy”. It can be found on our website at OakharvestFG.com or in video format on our You-Tube channel. Check it out. We hope you become a subscriber to our content.
First off, before we get into this week’s topic, which is on “Inflation”, I want to remind viewers, that Oak Harvest is a financial planner. We are an investment advisor whose financial advisors and planners put together integrated financial plans for our clients. That’s in addition to managing our clients investment accounts. Why do I lead in with this statement?
Because planning a retirement around a higher inflation environment such as the one we are currently in, whether its transitory or not, starts with a financial plan tailored toward your own cash flow needs first, and your greed’s second. There are minor tactical shifts that our investment team can make around the edges, however overall, hedging and planning for changes in inflation starts with planning for it with your advisor. This weeks title? Inflation sensation.
Viewers and long-term clients know, I hate government data and generally look down and frown upon quoting it because, in my opinion, it does not help one at all to manage money. I’ve discussed why in the past but it’s usually, lagging, stale, not predictive, and often adjusted numerous times, so by the time its announced, the investment markets have already adjusted themselves for the real world. In other words, by the time you see or hear about it on CNBC, its already priced into market prices.
On Wednesday of last week, this is what the news headlines read, “The consumer price index climbed 7% in 2021, the largest 12-month gain since June 1982, according to the Labor Department
data released Wednesday 1/12/2022. The widely followed inflation gauge rose 0.5% from November, exceeding forecasts.
Excluding the volatile food and energy components, the group of core prices accelerated from a month earlier, rising by a
larger-than-forecast 0.6%. The measure jumped 5.5% from a year
earlier, the biggest advance since 1991.”
The increase in the CPI was led by higher prices for shelter and used vehicles. Food costs also contributed about .5%. Energy prices, which were a key driver of inflation through most of 2021, declined .4%.
The December CPI showed strong demand for goods for the holidays and while many supply bottlenecks were still around due to Omicron induced labor shortfalls, they were beginning to slow. Goods inflation rose on the back of used auto and apparel prices. How many times a year do we buy a used car? Remember viewers that almost 75% of the US economy is service related, not goods consumption.
Shelter costs, which are a more structural component of inflation, and make up about a third of the overall index, rose 0.4% from the prior month. With other measures of home prices and rents surging in 2021, our team expects future CPI reports throughout the 1st half of 2022 will be high led by higher housing costs as goods inflation proves to be more transitory.
With all this bad headline inflation news, viewers might think that from an investment perspective, which is how I am paid to look at the world, interest rates would have rocketed higher last week and the US stock market declined meaningfully? Well, the answer is? Neither happened. Why? Largely because the markets are collectively smarter than the news channels and economists.
I’m going to drop a few examples of how late these news stories on macroeconomics are relative to the investment cycle by the time you hear them on TV.
I give you my first 2 charts as an example. These are charts of the market pricing of 10-year inflation break evens. As one can see, since our federal reserve reacted on the monetary side and our federal government reacted on the fiscal spending side in 2020 and 2021, this measure rose from roughly 75bps or 3/4rds of a % back to almost 2.75% in November of 2021 at the peak of inflation worries.
This is about the same level it peaked out on multiple times over the last 20 years. Even more telling is that for most purposes this measure peaked last May around 2.55%, which is where it currently sits. And these real-time pricing series, that you can buy and sell and invest in has gone nowhere ever since. Even with the rise in Delta and Omicron covid variants, even with supply chain disruptions, and even with the government CPI data measuring around 7%, the markets moved before all the government data came out, and the TV news channels made it headlines and breaking news, and the markets largely already factored it in.
What is this telling us? It’s telling us that the time to adjust one’s investment portfolio for a move up in inflation, if you were going to try to do that, isn’t necessarily now. It was a year or 2 ago when the billionaire hedge fund manager was on TV calling for global deflation and an end to democracy. And then again maybe when President Biden was elected and the markets were fearful of multiple back to back trillion dollar infrastructure and pseudo infrastructure spending programs on top of trillions we spent in 2020 to keep the economy moving while unemployment shot up to 12-15% under Covid.
Here’s another example that might be easier to see. A number of potential clients have recently asked us about investing in the Tips market, given the current high inflation environment. “TIPS”, or Treasury Inflation-Protected Securities, are Treasury bonds that provide some protection against inflation by adjusting pricing. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index.
Here is a chart of the TIPs ETF in the market.
Given last weeks CPI data of over 7% and given how loudly many economists and strategists in the financial press have been screaming about runaway inflation, one might think that this ETF and these bonds have been great places to park your cash or hedge against inflation over the past few weeks or months. The chart and reality say otherwise. Year to date you have lost 1.5% and since Jan 1, 2021 you have netted a little over 3.25% in positive return. This compares to a total return of over 25.5% in the SP500 through Jan 7th, over the same period. I ask you, which investment looks like a better inflation hedge from an investment standpoint?
So, you might ask, what can an investment team do to combat inflation in your portfolio? Generally, we can make minor adjustments around the edges if we see these affects as shorter-term risks as we have and still currently do. If, and when we see it as a significant investment risk, we can make larger tactical changes such as being more overweight industries and companies with pricing leverage or those less hurt by cost increases. Being more heavily tilted toward real estate, whose pricing power lags the market by a few quarters is another tilt that over longer time frames has helped offset inflation in one’s portfolio. Being overweight growthier names, not the growthiest, over time is still a practical strategy as their organic revenue and earnings growth should outpace inflation as well as any multiple and valuation compression.
However, at the end of the day, when it comes to talking about inflation and its affects on your life and financial behavior? The investment team at Oak Harvest recommends that you get on the phone and give our Oak Harvest team a call and ask to speak to one of our financial advisors. Set up a meeting or two and sit down with them and let our team craft an individual financial plan and long-term investment allocation that meets your financial and retirement needs first, and your greed’s second, whether the government CPI data is 2% or 3% per year, or over 5% or more for a few quarters our teams can both help you plan for the future or, if necessary, adjust to new financial conditions that life presents you, into and through your retirement years.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.