Clients are frequently advised that equities are an inflation hedge. For years, investors didn’t have to worry much about that advice because core inflation stayed relatively low while equity markets soared. This could be changing. Companies in a variety of S&P sectors and industries are raising their pricing for goods and services.
The “all items index,” which is part of the bureau’s consumer price index, climbed 5% between May 2020 and May 2021, according to a June report from the US Bureau of Labor Statistics. Since the time period ending in August 2008, this is the highest one-year gain.
Inflation-Related Concerns
This rise has sparked fears that the United States and the rest of the globe are on the verge of a replay of the 1970s, when inflation reached 13.5 percent by 1980.
Despite the fact that such a situation looks to be the worst-case scenario, advisors say customers are concerned about inflation eroding their retirement purchasing power.
Despite the demonstrated track record of equities surpassing inflation, Misty Lynch, a financial advisor with Beck Bode in Dedham, Massachusetts, says clients typically believe fixed income is a safer alternative.
“My role is to assist my clients in sticking to their plans, which includes staying in the market for the long haul,” she explains.
While it may appear wise to go to cash or bonds, it can result in low returns. Some investors who take their portfolio assets out of equities with the purpose of returning when the market conditions improve fail to do so in a timely manner, according to Lynch.
Why You Should Not Ignore Inflation?
Clients should keep the current bout of inflation in perspective, says Kevin Simpson, founder and portfolio manager of Capital Wealth Planning in Naples, Florida.
“A little inflation, like the pop we’re experiencing as we reopen an economy after a global epidemic, isn’t a bad thing,” he argues. “If there was no inflation, I’d be more concerned.”
Simpson points out that a 2% or 3% inflation rate is beneficial for corporate earnings, which boosts stock prices.
“We don’t want out-of-control inflation or sky-high interest rates. I’m old enough to recall gas lines and mortgage interest rates of 15% or higher. I don’t think we’ll be going there, which is a good thing “According to Simpson.
Simpson also suggests using tactical covered calls to profit from market volatility.
Preparing For Inflation Is A Must
Stephanie McCullough, founder and CEO of Sofia Financial in Berwyn, Pennsylvania, says she considers inflation in her continuous financial planning.
“The difference between anticipating 2.5 percent inflation and assuming 3.5 percent inflation is amazing when you’re looking at a 25- or 30-year retirement period,” she says. “When that seemingly minor difference is compounded over time, it has tremendous ramifications for whether a client has enough money to retire.”
Clients of McCullough have inquired about how inflation may influence their outstanding debt.
“If you have adjustable-rate loans, such as mortgages, home equity lines, or credit card debt, we recommend locking in today’s low rates,” she says.
“We frequently try to convince clients to avoid paying down fixed-rate debt, such as a mortgage or a vehicle loan,” she adds. “That money could be better spent building up your assets to serve as a cushion against price increases.”
