Most experts in a recent Bankrate survey say that stocks are a better investment option than bonds for overcoming high levels of inflation. Bankrate’s First-Quarter Market Mavens survey found varied opinions on the sustainability of current inflation levels, but there was general agreement about the best investment to beat it: stocks.
Inflation has been surging recently as economic activity booms following the global pandemic and supply-chain issues make it difficult for consumers to get what they want when they want it.
Inflation reached 7.9 percent on an annual basis during February, according to the most recent Consumer Price Index (CPI) report. Prices for used cars and gasoline each rose by about 40 percent, while prices for foods including chicken, eggs, milk and fruit all jumped by more than 10 percent.
Investors have been grappling with what higher inflation rates mean for the economy and markets. The Federal Reserve recently announced its first rate hike since 2018 as part of an effort to get inflation under control. Bankrate asked analysts to recommend what a typical investor should consider doing now in the face of historically high inflation.
Focus on defensive stocks and avoid bonds
“Managing the inflation risk means not buying bonds and protecting purchasing power by owning mid- and large-cap value stocks,” says Clark A. Kendall, CEO at Kendall Capital.
“An investor should be overweight equities versus fixed income and have a broadly diversified portfolio including companies in the energy and materials sectors, as we think inflation hasn’t peaked yet,” says Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
Chuck Carlson, CEO of Horizon Investment Services, was even more specific, suggesting that investors focus on companies with high employee productivity numbers such as revenue per employee. He also recommended companies that are growing their dividends because “owning a growing dividend stream can help combat the erosion in spending power due to inflation.”
Consider exposure to gold and commodities, but be cautious about recent run-up in prices
The survey respondents’ views on more traditional inflation hedges such as gold and commodities differed, with some recommending exposure to these assets and others preaching caution following a run-up in prices.
Carlson also suggested investors look at energy stocks because of their reputation as “good inflation hedges.”
Joseph Kalish, chief global macro strategist at Ned Davis Research, says the typical investor should have exposure to commodities and gold, as well as Treasury Inflation Protected Securities (TIPS) and real estate.
But not everyone is convinced of the benefits of these traditional hedges.
“While commodities have performed well in some inflation regimes, many times commodities are the cause of inflation,” says Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management. “Therefore, the bulk of their run-up in value tends to happen before broad inflation takes hold.”
“Gold has performed well in some cases, but it’s more volatile,” Mullarkey added.
“I would caution against chasing the recent run-up in commodity prices by pursuing a significant allocation to hard assets,” says Brian Price, senior vice president of investment management and research at Commonwealth. “Some exposure is fine but be mindful of a quick reversal should we get some encouraging news on the geopolitical front at some point.”
How long will high inflation last?
As to inflation’s persistence, survey respondents again differed.
“I believe that inflation is likely to moderate as we move through 2022,” says Commonwealth’s Price. “Current CPI readings have been shockingly high, but the Fed is acutely aware of this dynamic and will be acting accordingly with interest rate policy as we move forward.”
“Inflation should peak in the next few months but will remain relatively high over the intermediate-term,” says Kalish at Ned Davis Research.
But Zaccarelli of Independent Advisor Alliance and Briefing.com’s chief market analyst Patrick J. O’Hare both think inflation will get worse from here.
“We don’t believe it has peaked,” O’Hare says.
Sam Stovall, chief investment strategist at CFRA Research, says he thinks inflation will top out at an 8.5 percent annual rate during the month of April.
Fed Chair Jerome Powell has said inflation is too high and that the central bank is committed to getting inflation under control. The Fed has indicated that it expects to raise interest rates six more times in 2022.
