The U.S. central bank (or Federal Reserve) has continuously insisted that the consumer-price increases that have hit the US economy are “transitory,” spreading the message that conditions will naturally return to normal.
But skeptics point to recent readings of the Consumer Price Index, which surprisingly ticked higher in September after two straight months of declines, as evidence elevated inflation will be longer-lasting. Some bears argue that inflation levels should already be ringing alarm bells for investors, while comparisons to the “Great Inflation” period of the late 1970s — when the measure surged to 15% — are being made.
So, here is the question. How should we individual investors prepare ourselves during this probable “Great Inflation” ahead?
As far as the stock market is concerned, I believe there are 4 types of stocks we can invest in right now.
4 types of stocks to invest during “Great Inflation”
Simply put, the 4 types are, value, shareholder yield, momentum, and quality.
Value stocks, which are viewed as undervalued because of their comparatively “cheap” valuations, are one of the most clear-cut plays for higher inflation. As prices rise, stock price-to-earnings ratios fall as multiples compress — an environment that should lend value names to outperformance over their growth counterparts.
Stocks with high shareholder yield in the form of dividend issuance and share buybacks drive OSAM’s Market Leaders Value and can be smart picks as inflation rises. Firms in this factor repurpose shares by purchasing their own shares at discounted prices, which is a creative — and accretive — way to juice a company’s bottom line, given that it lowers the “float,” or supply of shares outstanding, which can send earnings, and share prices, up.
Momentum stocks, which tend to rise or fall for long stretches, may be viewed as an unconventional way to play a hot inflation environment. But strong momentum stocks move for a reason, including bright future earnings prospects. If investors can avoid overpaying, moderately-priced momentum names may be a unique and effective way to ride the inflation wave.
Finally, stocks of quality companies — meaning those with high-quality earnings and formidable balance sheets without much debt — are often strong candidates to weather price increases.