Inflation and Market Performance
With inflation heating up, many investors are wondering how their investments might perform during a period of inflation. Prior to the recent uptick, we had experienced decades of historically low inflation. Consumers are seeing the impact of inflation on items they buy everyday including groceries, gasoline, dining out and a host of other products they use on a regular basis. Inflation has caused a large increase in the price of new cars as well. How the market typically performs Data from the Federal Reserve Bank of St. Louis indicates stocks tend to perform the best when the CPI (Consumer Price Index) ranges from 1.1% to 4.0% over a 12-month period. This data is from 1979 through 2021. During periods of inflation at the higher end of this range, the data suggests that mid cap stocks and value stocks tend to hold up well. Companies with higher operating leverage often tend to perform well at the upper end of the inflation range. Many companies in the value and mid-cap stock categories tend to have more operating leverage than growth stocks. While equities can be impacted in the short term by inflation, over time they are a solid hedge against inflation. That said, different stocks will be impacted in different ways depending upon their ability to increase prices at a pace that lets them stay ahead of cost inflation. Equity categories that have historically provided a good hedge against inflation include: Real estate Energy Industrials Commodity based equites including those related to gold Current inflation For the one year period ending June 30, 2022, inflation in the United States was 9.1% (CPI). This is the highest rate of inflation since November 1981. The largest components of this latest CPI increase were energy including fuels of various types, gas for autos and utilities. The best performing S&P sector to date has been energy, up over 33% year-to-date through July 25. Communications services, consumer discretionary and information technology are the lowest performers, all off between 20% and 30% year-to-date. The Federal Reserve has pledged to combat inflation by raising the overnight funds rate and have increased it by 2.25% so far this year. The Fed appears committed, but the task could be daunting. Housing costs are a large part of inflation the calculation and might prove hard to budge. Labor can also be sticky. With increases in jobs, we saw productivity go down significantly in first quarter 2022 (-7.3%) and we may see similar results for the second quarter when announced August 9th (more workers and less output for first half of the year is fairly inflationary). Planning for some inflation to remain in the economy seems prudent. What should investors do now? Any market downturn or change in the economic landscape can be cause for investors to review their portfolio and perhaps their investing strategy. In reviewing your portfolio, this is a good time to be sure that your portfolio has been rebalanced back to its target asset allocation to be sure that the allocation reflects your risk tolerance and investing time horizon. While reviewing your holdings to ensure they are still a good fit for your portfolio, it is a good idea to make sure components of your portfolio will still serve their purpose in economic conditions like higher inflation. It can make sense to tweak your portfolio a bit to add some holdings that you feel might outperform in this environment, and perhaps reduce exposure to securities that might not be a good fit. This can be done in the course of rebalancing your portfolio. This might even lead to opportunities to do some tax-loss harvesting. Your best option is to discuss your portfolio with your Wedbush financial advisor. They can offer their expertise and objective advice to help you position your portfolio in line with your financial goals and objectives. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
RECESSION-ish
The economy and the stock market have been active so far in 2022. Much of the news has been negative with declines in the market, high inflation and the Federal Reserve increasing their benchmark interest rate. The “R-term,” recession, has been bandied about in the news media more and more recently. What is a recession? The official definition of a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” Measurements like GDP (gross domestic product), employment, consumer spending, productivity, and business purchases are considered. The imprecise definition leaves room for debate – that we have seen everywhere. A recession is a slowdown in the economy which effects, in many cases, financial markets. Often, we don’t exactly know we are in a recession until after it has started. But, we can see signs we are near recession territory. We will focus our discussion on what to do now, instead of if, when and blame. Past recessions Since the Great Depression, recessions have lasted an average of 11 months. Over that time, there have been 15 recessions. Recessions are part of the normal course of the economy over time. While we may link the stock market and the economy together, in reality they do not always move together. In fact, the stock market often recovers faster than the economy during recessionary downturns. What can investors do to make sure they are secure in times of market instability? While there are no guarantees in investing, there are things you can do to help mitigate your risk during times of market instability. A long-term investment strategy includes diversification in portfolio asset allocation, active downside protection, and realistic expectations of how holdings will perform in expected environments. Strategies will vary, based upon financial goals, tolerance for risk, and time horizon, but should always include a proactive plan to meet current and near market conditions. Proper diversification can help mitigate the impact of a market downturn. Diversified portfolios will contain a combination of investments that react differently to different conditions in the markets. Unlike a portfolio that is highly concentrated in one type of investment, some holdings in a diversified portfolio will be impacted less than others during a market downturn. “We can explore using tested approaches that take downside protection to a higher level than usually seen,” says Timothy Canty, Vice President, Investments of the Wedbush Securities San Diego office. We want to be sure your portfolio is diversified in sync with your situation. A person with a number of years until retirement might have a more aggressive allocation than a person in or nearing retirement. Your time horizon is a key element in formulating an appropriate investing plan. Budgeting, Liquidity, Spending Your day-to-day and monthly spending needs are not and should not be tied into your long-term investing accounts. One of the best ways to help ensure that you can keep your long-term investing accounts fully invested is to have money set aside for your short-term spending needs. Budgeting can help you understand your ongoing spending needs and to track your spending to ensure you are on track. Things happen, this is why most financial experts suggest people have sufficient liquidity to address whatever life throws their way. A standard recommendation is to have 3-6 months’ worth of your normal expenses accessible if the money is needed. Benefits of a recession Recessions and the often-accompanying market downturns can offer an opportunity for investors. This is an essential time to be sure your portfolio is properly rebalanced to reflect your long-term strategy. Additionally, this type of market environment can offer the opportunity to buy stocks and other securities that may be undervalued due to the market decline. In some cases, there can be opportunities for tax-loss harvesting when rebalancing in a taxable account. Losses realized from selling can be used to offset capital gains, or to offset other income. “Some of the indicators used to define recession point to it beginning in late 2021, so we should also be planning for the recovery that follows every recession,” observes Canty. Be sure to reach out to your Wedbush advisor to discuss your portfolio during these uncertain times. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.