Inflation's return may change investment returns

[Lethe200]

This is an excerpt from an article I ran across today:

What Inflation Could Mean for the Market
Barron's [cover article] by Avi Salzman, Dec 30, 2017
full article: https://www.barrons.com/articles/what-inflation-could-mean-for-the-market-1514604543 (NOTE: I accessed this thru my WSJournal subscription, so it may or may not be available for non-subscribers!)

Remember inflation?

Largely absent during the economy’s eight-year recovery from the financial crisis, inflation is on track to pick up in 2018—and it might just catch investors off-guard.

For now, price pressures are benign, even as U.S. economic growth cruises into the new year at a 3% clip, with business-friendly tax cuts on the way. The core consumer price index, which strips out energy and food, was up just 1.7% year over year in November.

Economists have raised the specter of inflation for several years, only to be disproved time and again. There’s reason to believe, however, that 2018 will be different—that prices will finally rise in a more sustained pattern, forcing stock- and bond-market investors to react to a new trend. “An unanticipated acceleration in inflation is probably the biggest risk for markets in 2018,” says Larry Hatheway, chief economist at GAM Investments and head of GAM Investment Solutions.

Economists like Hatheway aren’t expecting runaway inflation, as in the days of disco and leisure suits, when prices rose by double digits. They’re girding for an annual increase of 2% to 2.5% at the most.

Yet the return of inflation would change market psychology. “You don’t really need inflation of a great magnitude here to get an inflation surprise,” says Don Rissmiller, chief economist at Strategas Research Partners. “Just a little bit more inflation from where we are today is probably enough to generate an inflation scare in 2018.”

Such a jolt could reshuffle the market. Since 1950, stocks have traded at an average multiple of 18.1 times earnings when inflation has ranged between zero and 2%—the “sweet spot,” says SunTrust Chief Market Strategist Keith Lerner. At 2% to 4%, the multiple slips to 17.2.

Inflation is “the ultimate enemy of financial assets,” says Lloyd Khaner, president of Khaner Capital Management. “Name your financial asset—inflation tends not to help, if not kill it.”

Stocks that are sensitive to rising interest rates—from utilities to telecom companies—would be particularly vulnerable, while financial, energy, and materials stocks could ride a wave of accelerating growth in prices.

IN THE PAST TWO WEEKS, investors got an early taste of what could happen during an inflationary period, as weakness in the dollar helped send copper up 8%, even as stocks gained just 1.3%.

Bonds face a more dangerous reckoning. It won’t take much to turn investment-grade bonds into ugly investments, says David Lafferty, chief market strategist for Natixis Investment Managers. “Unless you think the economy is going to tank and rates are going to fall, the returns to high-quality bonds are somewhere between unimpressive and somewhat negative,” he says. Inflation could increase the pain “even if core CPI goes from 1.7% to 1.9%,” he adds.

Making the outlook so unpredictable is the peculiar economic cycle that followed the global financial crisis. Ultralow interest rates around the world inflated the value of some assets, but not wages or the prices of goods and services, leaving central bankers befuddled.

 

[retiredtraveler]

Yeah. All the major financial mags ran articles this month on their prediction that inflation is finally going to come and bite us, after so many years of near stasis. On the other hand, the fed will raise interest rates, and eventually, bond and CD rates will rise (along with prices in some areas ).
It's a wait and see..........

 

[mathjak107]

cd rates are always behind the curve when it comes to inflation rising . they only do well once inflation falls ,rates fall and you are locked in to the higher rate . they work the reverse on the way up and are always going to be behind.

not all bonds are interest rate sensitive . some can handle inflation well so you can not generalize and just say bonds will get hit .

i have reduced my interest rate sensitive bond funds way down , bond funds like total bond funds are very sensitive to rates as well as longer term bond funds . i prefer having more in go anywhere bond funds . they have a bit of high yield , international ,tips ,floating rate , emerging market ,etc . all that stuff is far less sensitive to interest rate increases .

 

[Buckeye]

In other breaking new, scientist have found that water is wet

 

[mathjak107]

except when it is a vapor

 

[Don M.]

Some degree of inflation is certainly probable with this fairly strong economy. However, I think the Fed will continue to try to suppress the Fed funds rate, and the "official" rate of inflation, so as to avoid a financial crisis revolving around a major increase in paying the Interest on our ridiculous National Debt. If the Fed Funds rate were to return to levels of 10+ years ago....4 to 5%....most of the Federal budget would be consumed by Interest payments.

 

[KingsX]

Moderate inflation would benefit me because I am debt free and my investment returns would increase with inflation.

 

[mathjak107]

depends , most assets do not like inflation . stocks took a beating along with real estate back in the days of high inflation . it wasn't until inflation came down that assets recovered and did well . generally you are behind the inflation curve . it is not a good thing unless you hold commodities .

markets don't mind a moderate rise in rates but it has to be very slow . they crumble under fast increases . no one can predict what the actual outcome will be with stocks and bonds until it happens . just stay flexible .

 

[mathjak107]

there are your after inflation returns from 1970 on . you can see when inflation rises , things ain't so good .

 

[KingsX]

The new GOP tax law uses "Chained CPI" to figure the rate of inflation.
When I first heard this, I thought to myself that maybe the government
knows inflation is about to take off... because "Chained CPI" is infamous
for underestimating the rate of inflation. Government officials have also
advocated using "Chained CPI" to figure future SS COLAs.

 

[mathjak107]

a good plan should be dynamic and flexible. no investment is best forever . my own portfolio has been dynamic for 30 years , like nudging a big ship to keep it on course it gets nudged a bit as the big picture unfolds .

i never plan around what if's .

when it comes to your personal cost of living their is no link to the cpi's at all . we are 1500 mini economies and the cpi is only a price change index on goods and services most of which we have no use for personally .some we use most we don't ..

a personal cost of living is very different . it depends on what you buy AND HOW OFTEN YOU BUY IT . it depends on the quality of the items as higher quality sees higher price inflation but may last a lot longer and it depends on what you personally are willing to sub .

so what the gov't uses to take the countries temperature and the 1500 mini economies we are comprised of it may be very very different than your expenses .

i am so much lower than even two years ago . we have not had rent increases allowed in 2 years in nyc and 1/2 of all rentals are stabilized apartments so that represents millions of people . i went from way over priced health insurance to far cheaper medicare and medigap .

my sister refinanced in arizona and she is spending less today than years ago . so we are all different and you have to adjust on your own to what you see , not what some index of price changes shows . .

 

[OneEyedDiva]

Economists kill me with this "there's been no inflation" or "inflation has been very low". Don't they go food shopping. They don't have to take medication? As seniors who have done both and they beg to differ. As a Muslim, I cannot invest in bonds, CDs or other interest bearing accounts (accept for those that pay a pittance) so what they do or don't do does not concern me. When looking to project how much my investments will be worth once I begin taking distributions I've been using Hugh Chou's Retirement Payout calculator which allows one to input whatever rate of inflation he or she chooses. I've stuck with the 3.5% default. Perhaps that's why over the last two 5 year periods, I wound up with $10,000 more than projected. I try to make frugal moves to offset the impact of inflation. How it will affect my investments, which to date have mostly had double digit annual returns, remains to be seen.

 

[mathjak107]

Economists kill me with this "there's been no inflation" or "inflation has been very low". Don't they go food shopping. They don't have to take medication? As seniors who have done both and they beg to differ. As a Muslim, I cannot invest in bonds, CDs or other interest bearing accounts (accept for those that pay a pittance) so what they do or don't do does not concern me. When looking to project how much my investments will be worth once I begin taking distributions I've been using Hugh Chou's Retirement Payout calculator which allows one to input whatever rate of inflation he or she chooses. I've stuck with the 3.5% default. Perhaps that's why over the last two 5 year periods, I wound up with $10,000 more than projected. I try to make frugal moves to offset the impact of inflation. How it will affect my investments, which to date have mostly had double digit annual returns, remains to be seen.

the cpi never reflects any ones personal cost of living or what they can invest in . i mean if we all considered how our investments did , heck many of us made enough since 2008 in our investments to never need a cola from pension or social security ever again . so you can see that has no bearing on things . cola's are not in anyway related to what you personally see .


as i stated above the cpi is only an index of goods and services that takes the temperature of the 1500 different mini economies that make up the country . like i said , my costs have dropped the last few years , mostly because i went from high priced insurance to medicare .

with the cost of money so low those who have mortgages are paying thousands less than we did years ago . those who bought cars are likely paying low to no interest saving thousands .

areas like nyc had 2 year rent freezes , 1/2 of all rentals in nyc and the boroughs were effected . that is millions of people who have not had rent increases in 2 years .

energy costs are very low now for years too compared to what we had .

so expecting just a price change index on goods and services which effect all of us differently to match what your personal life is , wold be like chasing a unicorn .

not all of us buy the same products as much either . my neighbor has no car , so when gas soars she almost has no effect , she lives in a stabilized apartment and as a senior within the bounds of being within the income requirements has her rent frozen now forever . all seniors under the scrie program here get no rent increases anymore .

so she is very different than me and we live next door .

on the other hand she has no money to invest so her personal life is effected that way to some extent . i don't have the protections she has but as an investor i have done very well so we made up for the lack of protections .

each one of us has to do whatever we have to do on our own .for some retirees it may even mean going back to work a bit if need be and they have no other options .

but the point is the cpi and cola adjustments will not have much in common with your life , nor were they ever intended to .

 

[OneEyedDiva]

the cpi never reflects any ones personal cost of living or what they can invest in . i mean if we all considered how our investments did , heck many of us made enough since 2008 in our investments to never need a cola from pension or social security ever again . so you can see that has no bearing on things . cola's are not in anyway related to what you personally see .


as i stated above the cpi is only an index of goods and services that takes the temperature of the 1500 different mini economies that make up the country . like i said , my costs have dropped the last few years , mostly because i went from high priced insurance to medicare .

with the cost of money so low those who have mortgages are paying thousands less than we did years ago . those who bought cars are likely paying low to no interest saving thousands .

areas like nyc had 2 year rent freezes , 1/2 of all rentals in nyc and the boroughs were effected . that is millions of people who have not had rent increases in 2 years .

energy costs are very low now for years too compared to what we had .

so expecting just a price change index on goods and services which effect all of us differently to match what your personal life is , wold be like chasing a unicorn .

not all of us buy the same products as much either . my neighbor has no car , so when gas soars she almost has no effect , she lives in a stabilized apartment and as a senior within the bounds of being within the income requirements has her rent frozen now forever . all seniors under the scrie program here get no rent increases anymore .

so she is very different than me and we live next door .

on the other hand she has no money to invest so her personal life is effected that way to some extent . i don't have the protections she has but as an investor i have done very well so we made up for the lack of protections .

each one of us has to do whatever we have to do on our own .for some retirees it may even mean going back to work a bit if need be and they have no other options .

but the point is the cpi and cola adjustments will not have much in common with your life , nor were they ever intended to .

Yeah...tell that to my friends who are struggling to make ends meet. Most because of excess medical bills. I feel for those who have to choose between buying food, buying their meds and paying for groceries. Of course they do what they can to offset the affects of inflation but often that is not enough. I have an online friend in a very close knit group on a senior site who did fairly well in real estate. She has children, so I don't know if she ever took a significant amount of time off to raise them, but she's really struggling right now. If not for the help of one of her sons, things would be even worse. Unfortunately, she falls between that gap of not making enough money to live comfortably but making a few dollars too much to qualify for assistance. I keep reading that the use of the chained CPI does not bode well with social security recipients...yet that is what the government wants to use.

 

[retiredtraveler]

".....Yeah...tell that to my friends who are struggling to make ends meet. Most because of excess medical bills.....".

That's always the kicker when discussing personal finance/investing/saving, etc. There are people who have tried to take care of their personal finances only to see them wiped out with medical expense. That, to me (without starting a political argument), is one of the worst things about this country. DW and I saved/invested and did well, and we pat ourselves on the back for that.
But it could all be gone with one serious, uncovered, major illness or accident. That is just sooo wrong.

 

[mathjak107]

i don't know anyone who was wiped out if they had proper health insurance in the first place . long term care is another issue but that too could be prepared for

 

[OneEyedDiva]

".....Yeah...tell that to my friends who are struggling to make ends meet. Most because of excess medical bills.....".

That's always the kicker when discussing personal finance/investing/saving, etc. There are people who have tried to take care of their personal finances only to see them wiped out with medical expense. That, to me (without starting a political argument), is one of the worst things about this country. DW and I saved/invested and did well, and we pat ourselves on the back for that.
But it could all be gone with one serious, uncovered, major illness or accident. That is just sooo wrong.

You are absolutely right RT. I read about a tent city that was being knocked down by a town in N.J., the state I live in. People living there had even built a wooden structure to use as a church. One of the couples had been very successful in business amassing wealth along the way. I believe they were self employed in their respective fields so don't know what their health insurance was like. The husband had a very serious medical issue which involved hospital stays and it wiped them out. I'm sure they never dreamed they'd be poor and homeless. I felt so bad for them. There were other stories similar to theirs. One man used to be a millionaire and was "reduced" to living with his father at age 50.