For investors, while it is nice to be positioned to take advantage of a best-case scenario and important to be protected against a worst-case scenario, it is crucial to see the most probable path with clarity. That probable path, in the aftermath of the pandemic, is one of somewhat higher inflation, somewhat tighter monetary policy and somewhat higher taxes. Moreover, these challenges may present themselves sequentially.

Higher inflation could come first and, on its own, would tend to be a negative for cash and bonds, neutral for equities and positive for real assets. 

A tighter Fed, in response to higher inflation, should hurt the bond market more while the generally higher interest rate environment it would create should be most damaging to equities selling at high multiples of current earnings and thus with more of their value embedded in cash flows to be received far into the future. 

Higher interest rates would, of course, further undermine the federal finances and would likely lead to higher taxes. Given the current preferential treatment of stocks in the U.S. tax code, higher taxes could be most damaging to equity returns. 

A logical investment strategy to meet these challenges would seem to favor both real assets and stocks trading at low earnings multiples both in the U.S. and overseas. And this is particularly important to recognize in the midst of the pandemic, as financial markets have tended in the opposite direction so far this year. 

It would be nice to believe that we will elect politicians with both the intelligence and the backbone to tighten fiscal policy once the pandemic has released its icy grip on the U.S. economy. However, in case we don’t, it is important for investors to be prepared for the consequences of an unrestrained surge in federal debt. 

David Kelly is chief global strategist at JPMorgan Funds.

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