We’ve been hearing the calls for months now. Inflation is coming. The government has been giving away money in the form of pandemic related stimulus for almost two years. Interest rates have been held down by the Fed for even longer.
You can’t flood the economy with all that free or cheap money for this long and not expect there to be consequences. At first, the consequences were thought to be temporary. We kept hearing the word “transient”. It’ll be short lived.
Then earlier this month Fed Chief J. Powell said inflation was not expected to be transient. It’s here to stay, and it’ll be here a while. Here’s how you can protect yourself and even profit from it. We have put together this list of asset classes to buy as we head into a multiyear inflationary period.
When the value of the dollar shrinks, one of the first places people feel it is in their rent prices. Both commercial and residential rents tend to increase during inflationary periods. You can take advantage of this by looking into REITs, or Real Estate Investment Trusts.
A REIT works very much like a stock but it is a collection of real estate assets. Typically a REIT will buy, sell and lease properties, with capital gains and rents paid out to shareholders in the form of a dividend. REITs that are collecting rents on commercial properties will do very well during an inflationary period. Now is the best time to start doing your homework and picking one that has a full portfolio of mature, rented out properties.
Commodities are another asset class to consider as a hedge against inflation. Food prices will rise and people will still of course continue to buy groceries. Commodities such as wheat, corn, and even coffee and orange juice are bought and sold on the exchange. The best strategy for a typical retail investor is often a commodity mutual fund. Invesco and John Hancock have some of our favorites, but most fund families have several funds to choose from. Putting at least a small amount of commodities exposure in your portfolio will be a good idea throughout 2022.
For individual stocks, two sectors immediately stick out as screaming buys heading into an inflationary period: Consumer Staples and Healthcare stocks.
There’s two reasons why these companies will do well. The first reason should be rather obvious. When money gets tight will consumers be more likely to stop buying new high end electronics, or will they stop buying shampoo and going to the doctor instead? Stocks like Proctor and Gamble (PG) and UnitedHealth Group (UNG) should be looked at going into 2022. They both sell products that consumers will continue to buy even as their spending power decreases.
The second reason these stocks go up isn’t quite as obvious. Remember the real price of the stock is not the price, but the price to earnings ratio (P/E), often called the “multiple”. These stocks tend to go through “multiple expansion” during inflation. Basically, since there are fewer options, investors tend to pay up for these stocks.
Right now PG pays a modest dividend and has a 30 multiple. That multiple can easily rise to 35 due to inflation. The earnings will stay the same because they sell products people must continue to buy. Plug in the numbers and use our ninth grade algebra, and the stock price could easily rise about 15% from $165 to $190.
Being a good investor means staying on top of macroeconomic trends, and we can be certain of the inflationary trend that will continue through 2022. It would be prudent to book some profits in those high flying tech stocks such as AAPL, NVDA and AMD that we have been recommending through 2021. These are still good stocks to hold, but no one ever got hurt from taking a profit especially when there’s a storm brewing on the horizon.