A year ago, I wrote the following in our quarterly newsletter: “We are seeing higher costs in almost everything we do, from prices to autos, lumber, metals, fuel, food, clothing, appliances, home goods, etc. Milk seems to be the only commodity that did not increase in price in February.”
Inflation is running at 40-year highs and there doesn’t seem to be a near-term resolution to reducing the nearly 8.5% increase in consumer prices from a year ago. The chart below from J.P. Morgan shows the contributors to headline inflation.
Many ask “how did we get here so fast”? One of the main reasons is that the government flooded the U.S. with COVID aid whether people needed the extra funding or not. They did this to prevent the economy from collapsing when they shut down the economy in 2020. The shuttering of the economy led to supply chain disruptions that we are still trying to correct. COVID also led to a mass of people retiring early, leading to thousands of job openings. All of these things have significantly raised our cost of living and now the Federal Reserve really has one choice and that is to raise interest rates to slow down inflation.
How might we invest to combat inflation?
Holding more than your necessary emergency funds in cash may be a losing proposition in an inflationary environment as seen in this chart provided by J.P. Morgan. You can see that $100,000 investment in savings accounts would give you only a $70 return over a year, whereas you would need to generate closer to $2,144 to keep up with educational inflation, $2,429 to keep up with medical care inflation, and an astonishing $6,416 to just keep up with overall inflation.
One way to combat inflation is by investing in quality companies over time. This chart below provided by Davis Advisors as of year-end 2021, is a representative example of two different styles of equity investing. One is in the Market Darlings (younger growth companies), and the other is in Durable Compounding Companies (established performing companies). The most striking things about the examples in this chart are:
- It takes 9 great old companies to equal the market cap of just 3 major growth companies
- The old companies produce 7X the revenue of the growth companies
- The old companies generate 6.7X the earnings of the growth companies
During volatile times like we are currently in, we are proponents of investing in companies that either pay great dividends or buy back shares on a continuing basis. Over time this may help you keep up with, or potentially outpace, inflation.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Terry Wiles and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. This is not a recommendation to purchase or sell the stocks of the companies mentioned.