APRIL 2022 |
57
INFLATION-RESISTANT Portfolio by Arthur Goldgaber
Is it 2022 or 1982? Investors' confidence rose last year as the pandemic and lockdowns seemed to be ending. There was positive conviction even with pauses due to outbreaks from new COVID-19 variants. Just as it seemed like there was light at the end of the tunnel, investors began to worry about new threats in 2022’s first quarter—rising inflation, interest rates, and geopolitical risks. The annual inflation rate in the United States increased to 7.9% in February, the highest since January 1982, according to the Bureau of Labor Statistics. Energy remained the most significant contributor as gasoline prices surged by 38%. Prices for housing, food, new and used vehicles also spiked. Another worrisome development was Russia’s invasion of Ukraine, causing loss of life, the destruction of many cities and a refugee crisis. It has also ratcheted up the risk of higher inflation, especially in energy and other commodity-related products.
Higher Interest Rates
In mid-March, the U.S. Federal Reserve raised interest rates for the first time since 2018 due to the dramatic rise in inflation. The U.S. central bank lifted its benchmark rate by 0.25 percentage points and signaled plans for further rate hikes this year. When announcing the rate hike, Federal Reserve Chairman Jerome Powell stated that "The plan is to restore price stability while also maintaining a strong labor market." He added that the central bank does not want high inflation to become entrenched because "the costs of that would be too high." The Bank of Canada made a similar move in early March, increasing its target for the overnight interest rate by 25 basis points to 0.5%, the first hike since October 2018. Bank officials emphasized that they would continue to use monetary policy tools to tame inflation. Their goal is to lower it to the bank’s 2% target and keep inflation expectations well-anchored.
with all the different risk profiles depending on those objectives, you cannot approach every client with the same solution," Currie says.
As interest rates rise, bond prices, which move in the opposite direction, have fallen. For example, the U.S. 2-year Treasury yield is now 2.33%, up from 0.786% on January 3. Meanwhile the 10-year Treasury yield is now 2.41% (March 30) vs. 1.637% on January 3.
Currie’s advice follows these points: • Step One. Begin with finding a financial advisor or planner professional. One thing to remember is that their designations matter. If someone is willing to invest in their education—enabling them to increase their knowledge and skills constantly—they will take the time to invest in your future and your money.
The danger with higher interest rates for ordinary citizens and businesses is that borrowing costs could rise, which, in turn, could slow economic growth. In addition, higher bond yields cause future profits to be less valuable, forcing stock valuations to decline.
Improving your Portfolio for Rising Inflation and Interest Rates
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With the macroeconomy changing so quickly, the average investor is quite concerned if their portfolio can cope with the new environment. Investors may be searching for trusted advice on to properly adjust their portfolio as inflation and interest rates rise. One financial advisor, Brandon Currie, CLU, CFP, CHS, RRC, offers the following advice to investors. His firm is licensed in British Columbia, Ontario, Nova Scotia, Newfoundland, and Labrador. First, he cautions that there is no "one size fits all" investing approach. He explains that each investor is different with unique goals, dreams, and time horizons. “Then, when you couple that
Step Two. Ignore all the industry acronyms/jargon; they merely confuse you. Take the time to research what the terms mean so that you are armed with the knowledge to conduct a conversation with your professional advisor. For example, he emphasizes that learning terms such as the difference between monetary and fiscal policy, macro and microeconomics, a stock’s market cap, stock split, etc., can be overwhelming. If you do not know, then don’t be shy to ask.
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As in the United States, inflation is at a multi-decade high in Canada. Canada's inflation rate rose to 5.7% in February according to Statistics Canada, as prices for a wide variety of goods such as gasoline and housing climbed. Statistics Canada stated that the inflation rate was the highest since August 1991. Inflation soared over January's 5.1% rate and was above the 5.5% predicted by economists.
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