The U.S. economy is recovering from the Covid recession and major market indices have continued to notch upward, yet many investors seem headed for a winter of discontent.
Emotionally scarred by the pandemic that kept them homebound much of last year, many clients are now afraid that the economic aftermath—the highest inflation in 30 years—will pummel their stock portfolios. For many, this fear is morphing into outright paranoia, fueled by incessant media reports on inflation, sticker shock from much higher prices at gas pumps and grocery stores, and exposure to the national obsession with what, for most, is a new discovery—the supply chain.
Though good economic growth has been firmly established, as reflected in abundant job creation in October, an ABC/Washington Post poll released at mid-month showed that about 70% of Americans believe the economy is in bad shape. Perhaps understandably, the public can’t seem to square recovery and a brisk market with an economy where abundant jobs are going unfilled.
Of course, all these worries are permeating investors’ consciousness. A recent survey by the Fed showed that investors’ biggest concerns include persistent inflation and the possibility of a resurgent pandemic powered by new variants.
Though their account balances may be rising, many clients are now worried about the potential for decline. Of course, this is a normal sentiment. But regarding the economy, from their glum faces, you’d think we were headed into a recession instead of climbing out of one.
Accordingly, this really isn’t a time for advisory handholding, as advisors must do in bear markets. Rather, times like these call for fact-based advisor-‘splaining to vaporize hobgoblins of irrational fear.
Here are some talking points to use when clients say:
“I’m worried that inflation will stymie my equity portfolio’s growth, and may even send shares plummeting.”
The historical impact of inflation on equities is widely misunderstood. Extensive research shows that on the whole, negative market impacts from inflation are the stuff of myth and assumptions. But many clients just aren’t comfortable without some sort of boogeyman, so they seize on perceived risk from inflation as though this were an immutable law.
Sure, there’s a lot of hair pulling over inflation by tech-heavy investors, but that’s mainly because rising inflation and the higher interest rates it tends to bring usually lower the valuations of immature growth tech stocks, especially those with negative earnings. And increasing inflation now has some analysts saying there’s more than a 50% chance of a Fed rate increase by this summer.
But stocks have historically been the best inflation hedge 75% of the time. Since 1973, over two-year periods after CPI inflation readings of more than 5%, the best-returning investment has been gold. But, as gold is hardly a viable long-term investment, most investors should focus on number 2: equities. Over the two-year periods after CPI inflation readings of 5% and below, the S&P 500 has beaten gold, returning 32.8% after inflation readings between 2% and 3%, 25.1% after inflation of 3% to 4%, and 17.2% after inflation of 4% to 5%. Though gold beat the index after CPI readings of more than 5%, the S&P 500 still rocked, with returns of 23%.