Investors Bedeviled By Inflation Should Stick With Stocks
Washington Times, The (DC)
These days are not easy for ordinary folks to invest for retirement and other life goals. COVID-19, inflation and President Biden’s woes dominate the headlines.
Omicron is highly contagious but not nearly as lethal as delta and predecessor variants. Hospitals are crowded, and deaths are high because we are getting walloped all at once.
By summer, we may have substantial herd immunity between those individuals that keep up booster shots and those who emerge from infections with antibodies.
That will make the COVID-19 endemic and manageable as new drugs like Pfizer’s Paxlovid become significantly more used. We will be able to cope with COVID-19 much as we do with the flu.
In the near term, though, shutdowns will prove temporary and not comprehensive. Mass layoffs are not likely, and businesses have learned to run virtually and boost productivity and profits.
Inflation is ripping at an alarming pace, and since the Korean War, no similar price surge has been tamed without a recession. Either from the precipitating surge in demand dying off from natural causes or the Federal Reserve slamming on the brakes.
Consumers and businesses are sitting on about $3 trillion in unspent COVID-19 relief payments, pay hikes for those workers in strong bargaining positions and profits that have not yet been distributed to shareholders or reinvested.
Americans will keep on spending even if forced to consume $50 wines and rack of lamb in curbside igloos and attend concerts in the Metaverse.
Don’t count on the Fed to yank the punchbowl this time. The three rate increases planned by Chair Jerome Powell are timid compared to the decisive action taken by Paul Volcker in 1979 and the early 1980s.
With former President Donald Trump waiting in the wings to recapture the presidency, Mr. Biden considering a bevy of doves for vacant Fed Board seats and Mr. Powell’s preference for tight labor markets, monetary policy would be terribly restrictive. We are likely in for a period of sustained inflation and reasonably decent real growth.
No one can ever rule out near-term volatility. Uncertainties abound from a threatened Russian invasion of Ukraine to the prospects for some version of Build Back Better getting through congress. And during pandemics, the forecasts of business leaders, pundits and economists are proving useless.
Consequently, with stocks selling near record highs, investors facing college or other immediate large expenses this year should weigh selling now to put aside the cash they will need.
Longer-term investors should consider the strategies for an inflationary era.
Consumer staples, utilities and real estate are among the usual stock-market prescriptions. However, with supply chain disruptions likely to persist, consumer products manufacturers cannot always deliver as planned. The situations in the Ukraine and Iran make energy supplies and the profitability of electrical generation uncertain, and real estate values have just experienced a historic run.
Gold is supposed to be the haven in times of inflation but tanked as prices rose in 2021. Cryptocurrencies have gone mainstream, but their prices remain terribly volatile.
Bond yields are well below inflation, and ETFs tracking initial public offerings have generally proven losers or delivered subpar returns. Picking winners in a pandemic is extremely difficult. Who would have thought with movie theaters reeling, AMC would be among the biggest winners of 2021? With production curtailed by a shortage of chips, Ford would double in value, and with delta and omicron again delaying the return to offices, Peloton would be among the worst-performing stocks of the year?
About four-fifths of the stock pickers at actively-managed mutual funds underperform the S&P500.
A low-fee, passively-managed S&P500 index fund or similar vehicle remains best for those investing for the long term. Just put in a fixed amount each month.
Stocks in the S&P500 are trading at about 30 times earnings, and that’s about 15% above the norm for the last quarter-century. However, the 25-year moving average and sustainable prices for U.S. equities have been rising for a generation as the economy shifts from capital-intensive manufacturing to high-tech and services.
During the recent recovery and inflation, businesses have raised prices relative to costs fast enough to deliver strong profits growth. Innovations inspired by COVID-19 will likely beget even more-impressive productivity gains, and with stimulus giveaways mostly ended, labor shortages should ease.
Stocks should continue to deliver earnings gains that exceed nominal GDP growth — the sum of real economic growth and inflation. Not that we can’t have a correction and even a short-lived bear market, but overall, a broad-based index fund like those sold by Vanguard and USAA will beat chasing fads, ruminations of opinion leaders and stock pickers.
• Peter Morici is an economist, emeritus business professor at the University of Maryland and national columnist.