Investors bid-up stock prices Wednesday as they bet on an increasingly accommodative Federal Reserve.
Consumer Price Inflation data from February came in slightly lower than some anticipated, causing investors to think inflation will remain tame in the near future. I hope they’re right.
I say this to make sure you are aware of the risk.
Nonetheless, rest assured, the Fed is unlikely to do anything until it is absolutely, positively, totally necessary and therefore, I maintain equities are still the PLACE TO BE.
This applies to both short term and, most especially, if you’re investing in the long hall.
Stocks are a Great Place To Hedge Inflation
U.S. stocks are one the best places to hedge your inflation concerns (commodities and gold funds help, too.) As always, I caution people not to put all their assets into equities. Make sure you have a rainy day fund and that your risk levels are proportionate to what you can afford. After all, we all want to be able to sleep well at night!
But, it’s important to be invested because, as I explain below, policy initiatives out of the Fed will favor stocks. (Scroll down if you’re looking for how to get started, what to buy, and what brokerage houses to consider.)
Bernanke, Yellen Unintentionally Helped Fuel a Great Class Divide
One has only to look at the hugely accommodative policies from Ben Bernanke and Janet Yellen during the Obama-Biden years to know that the Fed played a roll in driving-up asset prices in the stock market.
Though Federal Reserve bankers were hoping to increase liquidity for the overall economy, the Fed instead had the unintended affect of driving asset prices higher with its plentiful money and various rounds of Quantitative Easing (a fancy word for money printing.)
As a result, the Fed inadvertently helped fuel a division between the haves and have-nots, between 2008 and 2017.
The rich got richer, the poor stayed poor, and the middle class…that may not have been directly invested in the markets, got squeezed.
In short, it became an hourglass economy. A lot on top, a lot on bottom, while our middle class struggled.
During those years, the economy grew at an annualized rate of less than 2% while stocks soared. If you had money to invest, you benefited greatly from the Fed’s actions. If you were just a working Joe or Jill living paycheck to paycheck and had no capital to put in the markets? You lost out… because there was inflation in these asset prices like stock…but, NO inflation in actual real wages.
So, the moral of the story is: if you have money to invest…make sure you INVEST.
Consider Index Funds
My biggest piece of advice for first time investors is that they consider index funds. Over time, thanks to their low fees tend to fare better than managed funds.
SPDRs (know as “spiders.” SPDR is a low-cost ETF that tracks the S&P.
DIAs (known as “diamonds.” The DIA is a low-cost ETF that tracks the Dow.
QQQs (known as “triple Qs.” QQQ is a low-cost ETF that tracks the tech heavy Nasdaq Composite Index.
Put Your Money in A Low-Cost Brokerage Accounts
Put Your Money in a Low Cost, No Commission Brokerage Account. There are many these days, but, these are my favorites given their track records.
Inflation affects stock prices and drives them higher. After all, if dollars are that much more plentiful in an inflationary environment, then the dollar tends to lose value and you obviously need more dollars to value various companies or commodities.
This helps explains the rise in bitcoin which has topped $56k per coin. (Bitcoin is another topic for another day. It’s volatility needs to calm down if we are to every use it as an actual currency — which, quite possibly, given its extraordinary blockchain technology, it could become!)
Watch Treasury Markets For Clues Of Possible Stock Downturn
In the meantime, watch the treasury markets. Recently, treasury yields have come under pressure as investors grow weary of an administration that is incurring so much debt. Yields rose to 1.6% recently, the highest level in a year. (Keep in mind, that’s still incredibly low.) The question is: where do yields go next?
If yields are forced higher because investors lack the appetite for treasuries in this big stimulus world, then you’ll begin to see an asset reallocation OUT of equities and into bonds. Mortgage rates would move higher, as would car loans and other lending instruments.
Would that cause a total market collapse? I’ve certainly argued it could be quite problematic. Meanwhile, the investor Neil Grossman believes this spending is so out of control, we could wind up putting ourselves on a path to being a third world kind of nation! He thinks the market WILL collapse all the way to 1776 on the S&P at some point in the next several years given the amount of money flooding the system.
Despite these concerns, it’s my belief that for now, investors should BE DIVERSIFIED and STAY THE COURSE. Especially, if you have the time horizon to do so. Dollar-cost-averaging into a fund, by adding a set amount of money every week is the best way to do this because it helps iron out specific market fluctuations in your portfolio.
Don’t Bet Against America
Remember, over a twenty year period, it’s pretty hard to beat the stock market. To make a long story short, though we have serious headwinds in front of us at present, it never makes sense to bet against America.