Inflation: Hello Again?

Dave Donabedian, CFA
May 17, 2018

For investors who are too young to remember the hyperinflationary environment of the 1970s and 1980s, a period marked by rising inflation will likely feel uncomfortable.
 

The recent U.S. economic environment has been all but absent inflation, but that may be changing. On February 2, 2018, the Dow closed down 666 points on news that in January, wages climbed 2.9% year-over-year. The good news? A tight job market was forcing employers to pay higher wages. However, the news also sparked concerns about rising inflation and whether the Fed would combat it by raising interest rates more aggressively than anticipated.

The Fed did raise rates in March as expected but stuck with its forecast of two more hikes for 2018. However, its projection of core inflation rising above target by the end of 2019 may require a more restrictive rate policy, and the Fed has already increased the number of expected rate hikes over the next few years.  The clear takeaway, is that inflation should be back on our radar screen.

After a nine-year bull market and cumulative returns of over 400%, the U.S. may finally be on a path towards a more normal market environment. While this does not necessarily mean hyperinflation and massive spikes in interest rates, investors should be mindful of how their portfolios are positioned for an environment with tighter monetary policy, which is often a longer-term headwind for equity markets and a negative for fixed income investments. In other words, it’s a good idea to revisit asset allocations and consider adding investments that have historically performed well in inflationary environments.

For investors who are too young to remember the hyperinflationary environment of the 1970s and 1980s, a period marked by rising inflation will likely feel uncomfortable. However, re-calibrating expectations to include rising inflation, a lower return profile and more volatility, rather than nostalgia for the ‘best of all worlds’ environment of the last couple of years, is the smart thing to do.

To learn more, read the full article in the latest issue of The Advisor or listen to an audio excerpt of this interview below:

Dave Donabedian is chief investment officer of CIBC Atlantic Trust Private Wealth Management, serving in that capacity since 2009. His responsibilities include chairing the Asset Allocation Committee, as well as providing oversight of internal investment strategies and the external manager selection platform.