On Money & More – April 2021

The financial response to this ongoing (and hopefully soon subsiding) pandemic has been enormous. And while that has helped to stabilize at-risk households and to boost many stock indexes to record highs, it has also led to increasing concerns about prospects for inflation. Total Covid-related Federal expenditures are approaching $5 trillion, and with Covid-related restrictions loosening that could lead to significant increases in demand. An anticipated result of this economic stimulus is a rise in inflation. Exactly, how much is yet to be seen, but today’s market estimates have inflation rising to 2.5%1. Many forecasters think it will be much higher.

Whether or not we see notable inflation increases remains to be seen, but it also raises a question: What investments can help in an inflationary environment? There are many types of investments, but here we will focus on three core ideas: stocks, bonds, and gold.

Stocks are broadly at or near all-time high levels now, but they also show a strong historical upside in rising inflation environments. Also, while returns have been dominated by a small set of tech-related stocks in recent years, there are solid companies with strong dividend yields that have not become so overheated. The general concerns about valuations are reasonable, but high-quality companies with rising dividends (such as those we seek out in our Equity Income strategy) have a very long track record of being a nice inflation hedge.

Bonds are also quite high on relative valuations, and they are coming off one of the longest bond total-return runs in history. The 10-year Treasury yield has recently risen to over 1.6%, in large part on concerns about inflationary pressures and the inability to squeeze more yield out at these low absolute coupon levels. Our bond philosophy emphasizes going slightly down in credit quality instead of lengthening maturity dates, but getting total return out of bonds at this stage will be difficult. Bonds historically help to mitigate volatility, which we believe that can still accomplish, but acting as an inflation hedge in this environment is a tall task.

Gold has a lengthy reputation as an inflation hedge, but the actual results don’t fully match up to that reputation. The track record for gold is one of very high volatility, with pockets of both extreme high and extreme low returns. Much of this inflation-hedge reputation seems to stem from the late-1970s, when inflation sky-rocketed and gold returns were enormous. Since that time, the likelihood of gold actually providing an actual inflation hedge is much more spotty.

So, what should an investor do? The best answer, as is so often the case, is to not overreact and to maintain investment discipline. Bonds are meant to provide (modest) recurring income and dampen portfolio volatility. Gold can add value as a diversifier and provide returns in particular time pockets. But in the end, stocks have provided the most opportunity to beat inflation via total return as part of a diversified portfolio. Please let us know if you have questions about how to position your portfolio.

1 Source: @ChrlieBelilio US Breakeven 5-year inflation rate

All opinions and data included in this commentary are as of March 16, 2021 and are subject to change without notice. The opinions and views expressed herein are of Cutler Investment Counsel, LLC and are not intended to be a forecast of future events, a guarantee of future results or individual investment advice. This article is provided for informational purposes only and should not be considered a recommendation or solicitation to purchase or sell securities. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Investing involves risk, including the potential loss of principle. Neither Cutler Investment Counsel, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.