In most areas of life, worrying isn’t helpful. In fact, it can be harmful.
Someone once said that we can’t control half the things we worry about. But that we can control the other half of the things we worry about.
So… why worry?
Well, when it comes to investing in the stock market, worrying is healthy.
A healthy market has a good balance of bullishness and worry. That’s why you often hear the expression that stocks are “climbing a wall of worry.”
I think that’s where we are right now as we kick off the second half of 2021, though you may not believe that if you listen to a lot of the talking heads in the financial media.
But think about it. Just today, the Nasdaq and S&P 500 hit all-time highs. All three major indexes posted six-month returns that historically you would see in a full year.
And yet, most of what you read is about the worry. One worry specifically…
Without a doubt, inflation is the number one concern for investors heading into the second half of the year. It’s here. We can see it in the data, and we can see it firsthand at the grocery store and the gas pump. And the media is touting inflation as the next terrible thing to happen in the country.
But is it?
Not to me…
The economic definition of inflation is too many dollars chasing too few goods. Here’s a simpler definition — inflation is basically a tax on everyone.
It is often referred to as a “hidden tax” because you will not receive a bill in the mail to pay the government more money. Instead, as inflation increases, the purchasing power of your dollar decreases. Your cash becomes worth less, so there is also a direct cost to money sitting in checking accounts, vaults and money markets.
There is no hiding the fact that inflation is on the rise right now. The only important question is whether it is transitory.
I’m sure you have heard the word “transitory.” It’s being thrown around now by most central banks and Wall Streeters who want to sound smart. It means they expect inflation will be short-lived because it is being caused by extraordinary factors that will resolve.
The Federal Reserve believes this. And I am firmly in this camp as well.
I believe inflation is being exacerbated by supply issues that are hurting businesses around the globe.
Simply put, everything from semiconductors to fireworks is getting bottled up by an insufficient supply chain that can’t keep up as demand for goods shoots higher in a post-Covid world. I expect that to change as time goes on and everything ramps back up. And once the supply side of the supply/demand curve is back to normal, input prices should fall and bring consumer prices down with them.
That’s huge, and it should have a massive impact on the way we invest during inflationary periods.
In fact, that’s been a key topic on TV lately. Every analyst and talking head wants to tell you how to invest for inflation. I understand. It gets eyeballs. I’ve been there.
But there is another way to view inflation and investing that you don’t hear as much about…
There are two key pieces of information that are typically left out of the inflation conversation:
The timing of inflationary periods is often consistent with a strong economy.
Stocks historically perform well during normal inflationary times.
So when investing during inflationary periods, you don’t want to focus exclusively on inflation. The investment needs to make sense whether inflation continues to tick higher or not.
(Quick side note: All of our hypergrowth investing themes will continue to move forward with or without inflation.)
Too many investors ignore this. But the value is clear…
If inflation is temporary and largely dissipates in the near future, a hedge against inflation — or any investment focused solely on inflation — will almost certainly underperform by a big margin. But if you invest in stocks with promising outlooks for the next few years regardless of inflation, your risk of underperforming drops significantly.
At the same time, certain factors take on greater importance during inflationary environments. Here are a few things to look for in potential investments during times of inflation:
Pricing power: If a company is able to pass along higher input prices to its customers, it will fight off the negative effects of inflation.
Financials: Higher inflation often leaders to higher interest rates, which are a net positive for most financials.
Land and real estate: Real assets hold their value during inflationary times, which outperforms the shrinking value of cash in the bank.
Industrials: Some companies can get around the current supply chain issues by having enough materials or by being able to pass on the increased prices.
Commodities: While most investors would still turn to gold as their first inflation hedge, the new hedge of choice is fast becoming bitcoin and other cryptocurrencies, which are seen as a store of value.
Stocks: Stocks in general tend to hold up very well when inflation is rising. In the short term, growth stocks typically get hit at the first signs of inflation rising. But as long as it doesn’t turn into hyperinflation, innovative growth stocks in the trends we talk about here at MoneyWire will come out on the other side looking great.
And that’s the most important point of all.
The key to your portfolio holding up well as inflation rises is staying focused on the long-term potential.
Whether there is inflation or not, there will be more electric vehicles on the road in the years ahead. 5G will continue to expand globally. More genetic discoveries will lead to game-changing cures in healthcare. Cryptocurrencies will keep gaining mainstream attention and adoption. The space race will continue to heat up. And on and on.
On the date of publication, Matthew McCall did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.