Stocks have a good chance of keeping up with inflation, but not all equities are made equal when it comes to doing so. Inflationary periods, for example, tend to batter high-dividend-paying stocks like fixed-rate bonds.
Is inflation beneficial to bank stocks?
Inflation in the United States continues to rise, with the price index for American consumer spending (PCE index), the Fed’s preferred measure of inflation, rising at a rate of 4.2 percent in the year ended July, its highest level in over 30 years. Furthermore, core prices rose 3.6 percent, excluding volatile goods like food and energy. The figures come as a result of rising demand for products and services, which has outpaced supply systems’ ability to keep up following the Covid-19 lockdowns. Although the Fed is optimistic that inflation will fall, noting that it would likely lower its $120 billion in monthly asset purchases this year, the figure is still significantly above the Fed’s target of 2% inflation.
However, we believe that inflation will continue to be slightly higher than historical levels for some years. Personal savings, for example, have increased as a result of the epidemic, and the continuance of low interest rates over the next two years could result in higher prices for goods and services. Companies in the banking, insurance, consumer staples, and energy sectors are among the companies in our Inflation Stocks category that could stay steady or even benefit from high inflation. Compared to the S&P 500, which is up roughly 18% year to date, the theme has returned around 15%. Exxon Mobil has been the best performer in our topic, with a year-to-date gain of 28 percent. Chubb’s stock has also performed well this year, with a gain of roughly 20% thus far. Procter & Gamble, on the other hand, has been the worst performer, with its stock climbing only roughly 4% year to date.
Inflation in the United States surged to its highest level since 2008 in June, as the economy continues to recover from the Covid-19-related lockdowns. According to the Labor Department, the consumer price index increased by 5.4 percent year over year, while the core price index, which excludes food and energy, increased by 4.5 percent. Prices have risen as a result of increased demand for products and services, which has outpaced enterprises’ ability to meet it. Although supply-side bottlenecks should be resolved in the coming quarters, variables such as large stimulus spending, a jump in the US personal savings rate, and a continuance of the low-interest rate environment over the next two years could suggest inflation will remain high in the near future.
So, how should equities investors respond to the current inflationary climate? Companies in the banking, insurance, consumer staples, and energy sectors are among the companies in our Inflation Stocks category that could stay steady or even benefit from high inflation. Year-to-date, the theme has returned nearly 16%, roughly in line with the S&P 500. It has, however, underperformed since the end of 2019, remaining about flat in comparison to the S&P 500, which is up around 35%. Exxon Mobil, the world’s largest oil and gas company, has been the best performer in our topic, with a year-to-date gain of about 43%. Procter & Gamble, on the other hand, has underperformed, with its price holding approximately flat.
Inflation in the United States has been rising as a result of plentiful liquidity, skyrocketing demand following the Covid-19 lockdowns, and supply-side limitations. The Federal Reserve increased its inflation projections for 2021 on Wednesday, forecasting a 3.4 percent increase in personal consumption expenditures – its preferred inflation gauge – this year, a full percentage point more than its March projection of 2.4 percent. The central bank made no adjustments to its ambitious bond-buying program and said interest rates will remain near zero percent through 2023, while signaling two rate hikes.
So, how should stock investors respond to the current inflationary climate and the possibility of increased interest rates? Stocks in the banking, insurance, consumer staples, and energy sectors might stay constant or possibly gain from increasing inflation rates, according to our Inflation Stocks theme. The theme has outpaced the market, with a year-to-date return of almost 17% vs just over 13% for the S&P 500. It has, however, underperformed since the end of 2019, remaining about flat in comparison to the S&P 500, which is up almost 31%. Exxon Mobil, the world’s largest oil and gas company, has been the best performer in our subject, climbing 56 percent year to far. Procter & Gamble, on the other hand, has lagged the market this year, with its shares down approximately 5%.
Inflation has been rising, owing to central banks’ expansionary monetary policies, pent-up demand for commodities following the Coivd-19 lockdowns, company inventory replenishment or build-up, and major supply-side constraints. Now it appears that inflation is here to stay, with the 10-Year Breakeven Inflation rate, which represents predicted inflation rates over the next ten years, hovering around 2.4 percent, its highest level since 2013.
So, how should equities investors respond to the current inflationary climate? Stocks To Play Rising Inflation is a subject that contains stocks that could stay stable or possibly gain from higher inflation rates. The theme has outpaced the market, with a year-to-date return of almost 18% vs just over 12% for the S&P 500. However, it has underperformed since the end of 2019, returning only roughly 1% compared to 30% for the S&P 500. The theme consists primarily of stocks in the banking, insurance, consumer staples, and energy sectors, all of which are expected to gain from greater inflation in the long run. Metals, building materials, and electronics manufacturing have been eliminated because they performed exceptionally well during the initial reopening but appear to be nearing their peak. Here’s some more information on the stocks and sectors that make up our theme.
Banking Stocks: Banks profit from the net interest spread, which is the difference between the interest rates on deposits and the interest rates on loans they make. Higher inflation now often leads to higher interest rates, which can help banks increase their net interest revenue and earnings. Banks, on the other hand, will benefit from increased credit card spending by customers. Citigroup and U.S. Bank are two banks in our subject that have a stronger exposure to retail banking. Citigroup’s stock is up 26% year to date, while U.S. Bancorp is up 28%.
Insurance stocks: Underwriting surplus cash is often invested to create interest revenue by insurance companies. Inflationary pressures, which result in increased interest rates, can now aid boost their profits. Companies like The Travelers Companies and Chubb, who rely on investment income more than their peers in the insurance industry, should profit. This year, Travelers stock has increased by around 12%, while Chubb has increased by 8%.
Consumer staples: Consumer equities should be able to withstand increasing inflation. Because these enterprises deal with critical products, demand remains consistent, and they can pass on greater costs to customers. Our theme includes tobacco behemoth Altria Group, which is up 21% this year, food and beverage behemoth PepsiCo, which is almost flat, and consumer goods behemoth Procter & Gamble, which is down around 1%.
Oil and Gas: During periods of rising consumer prices, energy equities have performed admirably. While growing economies are good for oil demand and pricing, huge oil corporations have a lot of operating leverage, which allows them to make more money as revenue climbs. Exxon Mobil, which has gained a stunning 43 percent this year, and Chevron, which has risen roughly 23 percent, are two of our theme’s picks.
Heavy equipment manufacturers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players are among the companies in our Capex Cycle Stocks category that stand to benefit from increased capital investment by businesses and the government.
What if you’d rather have a more well-balanced portfolio? Since the end of 2016, this high-quality portfolio has regularly outperformed the market.
What happens to bank stocks when interest rates rise?
Inflation has the greatest impact on the value of fixed-rate debt securities since it devalues both interest rate payments and principal repayments. After correcting for inflation, lenders lose money if the inflation rate exceeds the interest rate. This is why investors sometimes look at the real interest rate, which is calculated by subtracting the nominal interest rate from the inflation rate.
How do you protect yourself from inflation?
If rising inflation persists, it will almost certainly lead to higher interest rates, therefore investors should think about how to effectively position their portfolios if this happens. Despite enormous budget deficits and cheap interest rates, the economy spent much of the 2010s without high sustained inflation.
If you expect inflation to continue, it may be a good time to borrow, as long as you can avoid being directly exposed to it. What is the explanation for this? You’re effectively repaying your loan with cheaper dollars in the future if you borrow at a fixed interest rate. It gets even better if you use certain types of debt to invest in assets like real estate that are anticipated to appreciate over time.
Here are some of the best inflation hedges you may use to reduce the impact of inflation.
TIPS
TIPS, or Treasury inflation-protected securities, are a good strategy to preserve your government bond investment if inflation is expected to accelerate. TIPS are U.S. government bonds that are indexed to inflation, which means that if inflation rises (or falls), so will the effective interest rate paid on them.
TIPS bonds are issued in maturities of 5, 10, and 30 years and pay interest every six months. They’re considered one of the safest investments in the world because they’re backed by the US federal government (just like other government debt).
Floating-rate bonds
Bonds typically have a fixed payment for the duration of the bond, making them vulnerable to inflation on the broad side. A floating rate bond, on the other hand, can help to reduce this effect by increasing the dividend in response to increases in interest rates induced by rising inflation.
ETFs or mutual funds, which often possess a diverse range of such bonds, are one way to purchase them. You’ll gain some diversity in addition to inflation protection, which means your portfolio may benefit from lower risk.
Where should I place my money to account for inflation?
“While cash isn’t a growth asset, it will typically stay up with inflation in nominal terms if inflation is accompanied by rising short-term interest rates,” she continues.
CFP and founder of Dare to Dream Financial Planning Anna N’Jie-Konte agrees. With the epidemic demonstrating how volatile the economy can be, N’Jie-Konte advises maintaining some money in a high-yield savings account, money market account, or CD at all times.
“Having too much wealth is an underappreciated risk to one’s financial well-being,” she adds. N’Jie-Konte advises single-income households to lay up six to nine months of cash, and two-income households to set aside six months of cash.
Lassus recommends that you keep your short-term CDs until we have a better idea of what longer-term inflation might look like.
How can I plan for inflation in 2022?
With the consumer price index rising at a rate not seen in over 40 years in 2021, the investing challenge for 2022 is generating meaningful profits in the face of very high inflation. Real estate, commodities, and consumer cyclical equities are all traditional inflation-resistant assets. Others, like as tourism, semiconductors, and infrastructure-related investments, may do well during this inflationary cycle as a result of the pandemic’s special circumstances. Cash, bonds, and growth stocks, on the other hand, look to be less appealing in today’s market.
Do you want to learn more about diversifying your investing portfolio? Contact a financial advisor right away.
What are the ways that banks profit from inflation?
- Inflation is defined as an increase in the price of goods and services that results in a decrease in the buying power of money.
- Depending on the conditions, inflation might benefit both borrowers and lenders.
- Prices can be directly affected by the money supply; prices may rise as the money supply rises, assuming no change in economic activity.
- Borrowers gain from inflation because they may repay lenders with money that is worth less than it was when they borrowed it.
- When prices rise as a result of inflation, demand for borrowing rises, resulting in higher interest rates, which benefit lenders.
How do banks fare during a downturn?
Even if we don’t fully understand what a recession is, we do know one thing about this dreaded word: it’s terrible news. Unfortunately, our investment rating was reduced to junk status in June 2017, and it was also announced that South Africa was in recession. Still, there’s no reason to be alarmed. Here, we define the term “recession” and show you how to navigate its choppy waters.
A technical recession usually happens when a country’s economic production falls for two (or more) consecutive quarters. There is some good development following the initial downward shift, but it does not sustain. Unfortunately, as reported by The Conversation, South Africa’s gross domestic product (GDP) decreased 0.7 percent in the first quarter of 2017, following a 0.3 percent contraction in the fourth quarter of 2016; a recession was inescapable.
During a recession, the first pattern that develops is that people cut back on their expenditure. People prefer to focus on saving when faced with the uncertainty that comes with a recession.
Unfortunately, most people are unaware that this is their natural reaction, and that it maintains a bad cycle. Less spending implies less consumption, which weakens the economy even more. As a result, the cycle repeats itself. Banks frequently lower interest rates during a recession to encourage borrowing and investing (an attempt to stimulate the economy). As the government strives to foster economic growth through policy changes, taxes and government spending vary as well. However, in the long run, this method may have a detrimental impact on the economy by raising interest rates.
During a recession, it’s vital to be prudent, but conserving everything and refusing to allow yourself modest indulgences like eating out once in a while or buying the clothes you need would only exacerbate the problem. Of course, you should be doing what you should have been doing all along creating and sticking to a budget to avoid overspending. However, there are a few additional options for surviving the storm.
While you may believe you are helping yourself or someone you care about, becoming a cosigner on a loan is not a wise choice, especially in these uncertain times. The truth is that you will be held liable if the borrower defaults on the payments. If it’s your loan, you might not obtain as favorable a rate as you would if you took it out on your own.
Taking on additional debt during a recession is generally not a good decision, with the exception of a home loan, which is used to secure an asset. You should make every effort to pay down your debt as quickly as feasible. Learn to wait and only buy what you require. Things you wish to accomplish should be put off until you have the funds.
While having your mortgage interest rate adjusted to the lower recession interest rates with an adjustable rate mortgage may seem like a smart idea, it’s vital to remember that the minute general interest rates rise, too will your mortgage. Sharp increases in interest rates may damage consumers’ ability to repay mortgage loans to the point that the financial institution has no choice but to reclaim the homes concerned, says Private Property. Its critical to guarantee that you play it safe with a fixed interest rate at times like these.
Do banks fare well during a downturn?
First, during a recession, interest rates tend to fall. Because banks’ principal business model is to lend money and profit, lower interest rates tend to result in reduced earnings. For instance, if a bank’s average vehicle loan interest rate is 5%, it will make significantly more money than if the average rate is 3%, all other circumstances being equal.
Second, and more importantly, during recessions, unemployment tends to rise, and more consumers get into financial difficulty. Consumers sometimes have difficulties paying their bills during recessions, which can result in an increase in loan losses for banks.
The longer answer, though, is that each bank is unique. Consumer banking (accepting deposits and lending money) is very cyclical, particularly for banks that specialize in riskier forms of lending like credit cards. Investment banking, on the other hand, performs even better during stormy times, therefore banks with strong investment banking businesses typically see profits hold up well. Goldman Sachs, for example.