Peas and Inflation

To our clients and associates,

A client recently mentioned that they hadn’t recently seen one of my newsletters encouraging people to “Stay the course” and “Hold your positions.” It reminded me of the story of a young boy who had never spoken. His worried parents brought him to doctor after doctor to see what was wrong and they were assured that he was capable of speaking. Then one day at the family dinner the six-year-old said, “The peas are cold.” After the shock wore off, his parents asked him why he had never spoken. He said, “Up until now things were pretty good.”

Similarly, there has been no need to reassure clients of the long-term potential of the stock market because the markets have done quite well as world economies recover from the pandemic. This is to be expected when you think about it. During the pandemic, businesses were shuttered, unemployment was at record levels and travel was all but eliminated. Now that masses of people have been vaccinated, they are free to travel, go to movies, dine in restaurants and attend family gatherings. The tremendous amount of debt reduction and growth in savings rates is now coming to the forefront as pent-up demand is overwhelming our supply chains and systems.

High demand and low supply is a classic forerunner of inflation. I look at my $50 gas bill and $30 lunch for two and it’s obvious that inflation is already upon us. As you’ve heard me say, inflation is the enemy of even the best financial plans.

So how do we prepare for and mitigate its impact? In a word: equity ownership. There is only one known asset class that historically has outpaced inflation: the growth in capital markets through stock ownership. Gold comes in around 2% a year over long periods. Most real estate averages about 2 ½% a year. Bonds are lucky to achieve 5%. Yet stocks – over long periods of time – clock in at about 10% per year on average.

Consider a 25-year retirement. Let’s drop back to December 1996 when the then-Federal Reserve Chairman, Alan Greenspan first talked about the irrational exuberance [of stock ownership].

• Since that time, the S&P 500 Index, which represents the American economy, is up more than six-fold. In fact, it more than doubled in the 40 months after his dire warning.
• $10,000 invested in the Index around that time, with dividends reinvested and taxes paid from some other source such as cash flow, would now be worth close to $100,000.
• Dividend distributions were around $14.90 in 1996 and are estimated to be around $60 this year – a four-fold increase.
• Yet the 1996 Consumer Price Index was 158.6 but will close out this year around 280 – an increase of a mere 1.8 times.

While past performance is not indicative of future performance, for my money the smartest place to be when inflation is eating away at purchasing power is in the stock market. We will certainly maintain bond positions where appropriate because declines in stock prices are inevitable and bonds tend to mitigate that eventuality. In addition, we use Treasury Inflation Protected bonds to offset the ravages of inflation.

So when the gas pump crosses $50 and your restaurant tab has three figures, remember that you are counterpunching inflation by investing in the world’s greatest companies.

Here it is: Stay the course and sleep well!

Al Wooster

Past performance is not indicative of future performance. Loss of principal and/or loss of portfolio value are possible.