Inflation fears rose in May as prices continued to do the same. Inflation has been a growing concern for months as our economic recovery from the pandemic has picked up speed. That concern is increasing rapidly in households and corporate boardrooms across the country. A recent Shopkick survey found that 77% of Americans are feeling the effects of inflation and 54% are very concerned about it.*
Not surprisingly, all this worry has triggered some stock market volatility. On May 10th the Dow Jones Industrial Average experienced a 1,200-point drop over two days. The S&P 500 and Nasdaq Index saw similar sharp declines, which most analysts attributed to worries about inflation.** Though the market has rebounded since then, as of this writing it remains below its peak high from May 10th, and has yet to regain the momentum it appeared to have before.
Wall Street’s reaction is hardly surprising. Inflation is usually seen as a negative force on the stock market for several reasons. Most importantly, it reduces expectations for earnings growth, which puts downward pressure on stock prices. But will inflation continue to rile the current market or even trigger the next correction? No one knows for sure, but here are some important points to keep in mind. First, investors typically expect a certain amount of inflation each year and factor it into their projected returns. Since the markets quickly stabilized after May’s volatility, it could indicate investors have now priced inflation into this market and made their peace with it.
Another important point is that Wall Street tends to react much more negatively to inflation when the economy is contracting or in a recession than when it is expanding, like it is now. Also, keep in mind that after rising steadily into late March, long-term interest rates have since stabilized. At the same time, the Fed has reaffirmed its commitment to keeping short-term rates near zero, and to open-ended quantitative easing. All these factors should help offset Wall Street’s worries about inflation even if prices continue to rise sharply in the coming months.
Nevertheless, it’s important to be sure your current allocation is still right for your risk tolerance and still aligned with your goals because—just like prices, interest rates, and all the other market forces—those things can change, too!
When managing your portfolio at SIS, we look for one of four possible “enhancement” trades while reviewing securities and possible transactions. Income generation is our primary goal for our clients, and we consider the following four portfolio enhancements before transacting: current yield, yield to worst (minimum projected annualized total return), interest rate risk, and default risk. The intents of these transactions are categorized as follows:
- Pay Me Now – Enhancing current yield
- Pay Me Later – Enhancing yield to worst
- Cover My Assets I. – Managing interest rate risk
- Cover My Assets II. – Managing default risk
We evaluate the transactions by determining whether they meet one, two, three, or all four enhancements. A baseball analogy for this: SINGLES, DOUBLES, TRIPLES, and HOME RUNS.
There were no swaps this month.
*“83% of Americans Are Belt Tightening Due to Inflation Pressures,” Forbes, May 24, 2021
**“Inflation Spooks Stocks and Raises Fear the Fed is Wrong,” CNBC, May 12, 2021
Note: The above trades were recent block trades and do not reflect all trades done on an individual specific basis. Sound Income Strategies, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not an indication of future results. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein.
You are advised to give independent consideration to, and conduct independent investigation with regards to the information above in accordance with your individual investment objectives. Use of the Information is at the reader’s risk, is strictly intended for informational purposes in conjunction with the recipient’s due diligence, and should not be construed as a solicitation by Sound Income Strategies, LLC. Past performance will never indicate or guarantee future behavior. Sound Income Strategies, LLC does not represent or warrant that the contents of the document are suitable for you from compliance, regulatory, legal, or any other perspective. We shall have no responsibility or liability for your use or non-use of the document or any portion thereof.
Sound Income Strategies, LLC is registered as an investment advisor under the Investment Advisers Act of 1940 and is regulated by the SEC. Sound Income Strategies, LLC and its affiliates may only transact business or render personalized investment advice in those states and jurisdictions where we are registered or otherwise qualified to do so.