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Equities - The Inflation Hedge Thumbnail

Equities - The Inflation Hedge

Posted by John Posey

I think it’s always important to note one key fact as an equity (AKA stock) investor: there will always be public speculation (to varying degrees) of a crisis at all times.  And many of us will start really considering it the louder the noise becomes. I want to remind you that markets recover over time as we have witnessed now and historically. I don’t think this fundamental assumption has much possibility of changing, but I think many of us have a tendency to listen up when we hear things that contradict it because it often sounds like someone trying to help us. Since cynical and pessimistic messages of market implosion often appear to come from a place of helping us avoid disaster is all the more reason to treat them with a grain of salt. Let me be the first to tell you pessimism has not paid well for many long-term equity investors that make decisions on market noise in my experience. I’m no internal optimist, just a realist.

Cash is not a creator of wealth but a preserver of it – at least temporarily. It preserves wealth in the short term and erodes wealth in the long term. Why an erosion of wealth in the long-term you ask? Inflation is why. The purchasing power of your cash dwindles as the cost of things goes up over time. It’s important to remember owning equities is your friend in fighting inflation.

Now I can point to many crises proclaimed to be the demise of the world as we know it in recent history including COVID-19, mass global economic decline, the election, and the overvaluation of markets to name a few. Now inflation fears seem next up on the doomsday carousel. Now I’m not here to speculate that we will experience inflation – we already have and I think we inevitably will going forward. Yet inflation is not a sign to exit equities but the very reason to own them. It’s one kind of asset that tends to appreciate as the cost of things go up, but we can’t expect it to go up in lockstep with inflation. There can be periods of equity decline as inflation moves higher, particularly in the short-run as businesses attempt to restore their margins and pass on higher prices to consumers. Unfortunately, the cure for higher prices is often higher prices -  that is until improvements in productivity and innovation eventually come around.

A finance author recently pointed out that the yield on the 10-year Treasury note has averaged near 6% for the past 60 years and currently is hanging around 1.5% as of June 2021. A runaway rates narrative has a long way to go. Besides, just consider the current national debt coupled with higher borrowing costs associated with higher interest rates – I’m certain the Fed has. There are some significant influences to keep rates on a slow grind upward.

The key now and always is successfully achieving balance – now with interest rates likely going higher and sustaining healthy economic growth. It may not be an easy task but I wouldn’t bet against it. Over the long run, optimism is just realism.  

Happy investing.

Advisory services offered through Plains Advisory LLC, an investment adviser registered with the State of Nebraska. Insurance products and services are offered and sold separately through John Posey, a licensed insurance agent. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Any information provided is designed to provide general information on the subjects covered, it is not, however, intended to provide specific legal, tax, financial or investing advice and cannot be used to avoid tax penalties or to promote, market, or recommend any plan or arrangement. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

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