U.S. Treasury Secretary Janet Yellen might be okay with a period of high inflation created by Biden’s infrastructure plan and the effects of an economy attempting to rebound from a pandemic downturn.

But history reveals that such an inflationary time is not too kind to investors’ portfolios, as they await defensibly for higher interest (which do tend to lower market returns) from the Fed.

Since 1962, Goldman Sachs Chief Strategist David Kostin discovered the median monthly equity market return during high inflation is an annualized 9% vs. 15% during times of lower inflation.

The median monthly return has been 2% annualized in times where inflation was higher and increasing compared to 15% when inflation was higher and lowering.

During times of raised inflation all the way back to 1962, careful stock choosing was more important as true volatility tends to lag. Kostin’s research reveals that the energy, health care, real estate and consumer staples industries perform best during such higher inflationary time periods. Tech and Material stocks have it the worst.

“Inflation can turn into a headwind to valuations if it causes expectations of Fed tightening and greater interest. S&P 500 has been consistently positively connected with breakeven inflation but valuations are usually contracted along with sharp upticks in real interest rates,” warns Kostin.

Market investors have not had to go far to discover bad levels of inflation.

The personal consumption expenditure index grew quicker than expected, higher 3.1% in April. Fed officials see the index as being the best sign of pricing pressure within the economy. The Fed thinks that 2% inflation is a healthy amount.

Also, the April Consumer Price Index increased at the quickest pace since Sept. 2008, coming in around 4.2% compared to a year ago. Meanwhile, consumer expectations of inflation are also increasing.

But even with these bad inflation changes, Kostin says investors are looking past them and accepting the Fed’s view about inflation being transitory.

“Despite noisy data, increasing commodity prices, and heightening labor costs, new equity returns actually reveal a lowering of investor inflation worries.” Kostin said.

Author: Scott Dowdy

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