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When you invest, you are accumulating assets that will hopefully increase in value and give you returns from income payments or capital gains, including securities, real estate, cash, bonds, etc. When inflation is high, investing can sometimes be difficult to navigate.
Inflation Rates
In the U.S., we are facing inflation that could impact the country’s stock market for a while. Inflation is essentially the cost of goods and services that “inflates” with time. If people’s income doesn’t grow along with inflation, then there’s less money around to invest with. Short-term skyrocketing inflation lowers the value of buyer’s money, which can in turn affect corporate profits.
In the U.S. last June, the annual inflation rate hit its highest level since 1981 as groceries, vehicles and housing rose, so there was less cash available to buy “extras.” One month later, inflation went down a bit, mainly from lowered gasoline prices.
Because of the ongoing COVID-19 pandemic and supply chain issues, we’re seeing low supply while demand is wanting to grow. The war in Ukraine also hasn’t been helping, nor is the growing expense of labor and oil. Thankfully, the U.S. Federal Reserve Board stepped in, increasing interest rates to bring down demand, and additional rate hikes are anticipated for this year to combat inflation.
Bonds
If you are investing in bonds, you are susceptible to the risk of inflation since bond payouts are set by fixed interest rates, and you might be saddled with lower purchasing power in the years to come. If you are working with variable-rate investments on your bonds, their payments are based on an index that varies with inflation rates (like the prime rate), such as Treasury Inflation-Protected Securities (TIPS) and I bonds, whose returns are linked to consumer goods prices. And then there are convertible bonds that can trade like stocks.
Growth Stocks
If you are an equity investor instead of a bondholder, you likely have fewer reasons to worry. While a greater inflation rate is linked to lower returns on equities, stocks can vary. For example, if you own value stocks, you can do well with reasonable inflation rates. Being front-end loaded, value stocks tend to return capital to shareholders faster than growth stocks do, so they are good when it comes to cycles of moderate-to-high inflation. On the other hand, growth stocks are back-end loaded since they are longer-term assets. Thanks to the high-inflation levels we’re currently experiencing, growth stocks could still be a good long-term investment strategy. Financial, energy and resource companies do well when the economy is booming or recovering, while stocks in energy, utilities and consumer goods do poorly during inflation.
For various analysts, the projected inflation rate over the next year seems likely to go down, making buyers more hopeful. But there are still whispers of a recession in 2023, so we’ll need to keep an eye out for what’s ahead. Much of the uncertainty lies squarely on the specter of COVID-19, which is making it hard to guess in what direction the economy will ultimately go. In that respect, only time will tell.
Diversification
If you are an investor during these uncertain times, you might be safest sticking to historically tried-and-true investment principles for the optimal outcome. This means managing risk by potentially diversifying your portfolio across sectors, markets, currencies and countries, if so inclined. You can still invest during times of inflation, so approach your investment opportunities cautiously and wisely. After all, inflation typically tends to be temporary and manageable when it comes to long-term investing.
Why Corporate Capital
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Whether you are looking to start a business or are a seasoned entrepreneur, our team of licensed professionals and legal experts is here to help. Call our business management team in Las Vegas, Nevada, at 855-371-0070 today!