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The inflationary trend is now self-perpetuating, but that doesn’t mean investors cannot earn excellent returns.

Start with today’s inflation:

The three underlying causes are:

  1. Too much money
  2. Too low interest rates
  3. Inflationary actions/reactions being taken by businesses, other organizations, employees, consumers, investors and Wall Street

Number 3 is the reason an inflationary trend is so hard to stop. It’s a chain effect of “sellers” pushing prices up at least in line with cost increases and “buyers” attempting to hold back the inevitable.

Therefore, don’t expect this Fed to subdue inflation with a “soft” landing. Inflation well above the Fed’s 2% target likely is here to stay and even increase until the Federal Reserve and political leaders accept the need to take drastic, unsavory actions.

Okay, that sounds dire and distressing. So, where does the happy investor part come in?

How investors can win from the inflationary growth periods

Remember, inflation is rising prices. On the surface, that means company revenues and earnings get an inflationary boost, producing stock price gains for investors.

However, industries and companies get affected differently. Therefore, succeeding in the coming inflationary bull market means adjusting strategies and expectations for the altered environment.

How to adjust strategies and expectations

The conditions to understand and accept are:

Inflation – Expect a rising cycle of higher highs and higher lows as organizations and consumers get into the swing of it

Interest rates – Realize they are still well below the level capital markets would set without Federal Reserve interference. So, consider this a bonus inflationary period where the Fed says it is tightening, but it actually is only reducing the loosening already in place. In other words, there is a long way to go before conditions truly get tight.

Economic growth – Until there is a recession, “real” (inflation-adjusted) GDP growth will remain positive. That means “nominal” (not inflation-adjusted) growth will be increasing at a higher clip as prices rise.

Company growth – Here is where things get interesting. An inflationary environment creates winners and laggards. Therefore, do not expect yesterday’s winners to be tomorrow’s in this new environment. Most likely, a significant shift will occur. And that brings us to…

Company stocks – As the financial, economy and business conditions transform, so, too, will Wall Street. Expect to see new strategies, selections and valuations based on inflation-based rationale. And that means the biggest change ahead is probably…

The shift to actively-managed funds from index funds

The inflationary growth period will push “outperformance” to the top of investors’ wish lists. No longer will matching the whole market’s middle-of-the-road results be satisfactory. As active managers charge ahead, investors will begin jumping aboard.

Skeptical? Don’t be. The combination of new, different and outperformance will be like meat to today’s malnourished investors. It’s a bull market cycle driven by extraordinary conditions that will replace the worry refrain of inflation-interest-and-recession (Oh, my!)

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Note: Like many stock market periods, the reasons and results come from a combination of conditions and actions – not one simple explanation. Therefore, be sure to read my previous article, “Exceptionally Good Conditions For Stock Bull Market Launch In July.” In it I list four actively managed funds in which I have invested.

The bottom line: Multiple conditions build inflation trends, so ignore simplistic commentaries

Many (most?) media reports link simple explanations to results. Ignore them. They are written by reporters on a deadline with no time for analysis. Just think back to the gyrating explanations for each daily (or intraday) stock market move. The reason cited is normally a coincidental occurrence. For example, “8.6% inflation!” Or, “Consumer sentiment at a new low!” Or, when a simple reason is lacking, something like this from The Wall Street Journal (June 27) – (Underlining is mine)

“U.S. stocks slumped Tuesday, giving up early gains and falling for a second consecutive day as investors parsed fresh economic figures for clues about the pace of monetary-policy tightening.”

No, the market didn’t fall because investors were parsing for clues about anything. In fact, most short-term market moves are noise, often reversed a day or two later. A better short-term period to watch is a week, because the weekend market closure has day traders sitting on their cash.

Instead, follow economic, business and financial developments without trying to tie each to a stock market move. A beneficial approach for linking everything together is quarterly analysis. Why wait three months? Because each quarter contains all the earnings reports (and management outlooks), followed by the quarter-end reporting and analysis from active managers. Moreover, examining a trend quarter-by-quarter does away with all the in-between gyrations that can produce more uncertainty than understanding.

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