As a reminder, this figure is a year-of-year comparison. Meaning prices in May were 8.6% higher than they were in May of 2021. I know I don’t have to labor over this point. Everyone is well aware of the stress these increased prices have put on your day-to-day life. Every time you take your credit card out to purchase something, you are reminded of it.
Historically, inflation has fluctuated over time (see figure below). As you’ll notice in the graph below, it typically runs hot during the late stages of an economic expansion, periods of increased commodity prices, or times of war. Unfortunately, at this point in time, we are facing all 3.
To combat this economic issue, you’ll notice the federal reserve has already begun to aggressively hike short-term interest rates. This in turn will increase the cost of capital, decrease the money supply, and hopefully slow down the economy and prices.
It is our belief that the fed’s action from here will be solely directed at combatting inflation and inflation alone. Being late to the solution, they are behind the curve and have a lot of catching up to do. The risk of an 80’s style inflation is very real, and they do not want to be caught in that. Earlier this week you saw them raise short-term interest rates by 75 basis points, with the thought that there will be more hikes to come. As of this morning (Thursday), other global central banks are following suit showing it is indeed a worldwide problem.
Similar to the Federal Reserve having an action plan, we believe that investors should have their own strategy as well. With the acknowledgment that every individual’s circumstance is a little bit different, one understands “risk tolerance” is an individual thing. When the ride gets bumpy, not all can handle the same degree of turbulence. Volatile markets are a time for self-reflection and this time is no different. Looking forward, it’s hard to ignore history throughout these periods of economic uncertainty, and what history tells us…. There is no better medicine for inflation than owning/buying equities. Throw in the recent sell-off in both fixed income and equities year to date, and it’s clear that now is not the time to panic sell. We recognize this is difficult to do and morale is not high at the moment, but this is how all of our clients can make money over the long haul.
We intimated over the past rantings as to our future outlook. This leads into the discussion of our allocation changes. We have been in a neutral position for quite some time now and it has treated us relatively well. We are now in the process of moving between 3-5% of our cash and fixed income weighting into equities going from “neutral” to “slight overweight” on equity. This is not us calling a bottom which we leave to others like Cramer and the social media gurus. It’s a tactical rebalance with inflation on the rise and markets at a discount. As always, we are here if you or someone you know have any questions at all.