Have you noticed prices are rising everywhere you look? That is a sure sign that inflation is here, at least for the time being.
We believe inflation will continue to march forward until supply chains can catch up for producing goods needed for consumers and businesses. Oil prices have fallen sharply from the recent high and that should be helpful in terms of mitigating increased input cost for businesses and retail costs for consumers.
We have already adjusted portfolios on the assumption that inflation would be an ongoing experience in 2022. However, we think it is important not to overreact because inflation will likely moderate once reopening occurs on a global basis from the Covid pandemic crisis.
We have positioned portfolios with fixed income strategies as follows:
- Lower duration than the average bond market.
- Slightly reduced credit quality to capture additional yield.
- Added alternative assets such as dividend paying stocks that provide income streams without much interest rate risk.
We think this is the right approach to take.
The following chart indicates why interest rates have been rising. GDP growth is booming.
It's important to keep in mind that while strong GDP growth creates inflation, it also can increase corporate earnings and it does suggest that US businesses are healthier than they were a year ago in the middle of the pandemic. Long-term, this is a positive for US economic prospects. That tends to be a positive for markets.
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