Inflation: Just Go With It

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In his Daily Market Notes report to investors, while commenting on inflation, Louis Navellier wrote:

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Q3 2021 hedge fund letters, conferences and more

The seasonal melt up is in full swing now and the wall of worry is being scaled in earnest. The leading companies have adapted to the uncertainties the pandemic has wrought, and are actually seeing accelerating growth despite the huge size they have grown to.  The big boost to the market today is solid profit growth and strong outlooks into next year's prospects. The market is being rational.  Outside of a Black Swan event, expect it to continue into the new year.

Go With Inflation

The yield on the 10-year Treasury is 1.67%, a level not seen since last May, and WTI crude traded up to $84.20 per barrel. Treasury Secretary Janet Yellen tried to soothe the situation. In an interview on CNN, she said spending in President Joe Biden’s domestic infrastructure and Build Back Better packages would be allocated over the next 10 years, but she did not say whether that would exacerbate inflation or not.

Yellen’s evasive answer went like this: “I don’t think we’re about to lose control of inflation. On a 12-month basis, the inflation rate will remain high into next year because of what’s already happened. But I expect improvement by the middle to end of next year – second half of next year.

Middle to end of next year? That’s a lifetime for today’s market investor, and yet the S&P 500 is trading at a new all-time high without the full participation of FAANG stocks and the semiconductor sector. Oil and gas, banks, insurance, asset managers, private equity, trucking, shipping, big box retail, food processors, auto parts, and computer hardware were standout performers last week for those companies benefiting from higher commodity prices, rising bond yields, and the ability to raise prices easily, such as software companies, without incurring major spikes for input costs. This has been the basis for embracing the idea that there is no better alternative than the stock market for generating inflation-beating returns.

Rather than fight inflation, there is the argument that investors should “go with it” and position portfolios to reflect the tailwinds of inflation. The commodities market is in a powerful uptrend at present and much of the global economy is still stuck in first gear, with China showing a slowdown in growth last week amid the supply chain bottlenecks. Further outbreaks in Covid-19 are also making the global recovery very uneven and problematic for several economies that are key suppliers to these raw materials markets.

Generating An Inflation-Sensitive Blended Yield

To this end, income investors seeking yield outside the Treasury, corporate, and other fixed-rate asset markets where price erosion is evident, there are wonderfully high-yielding dividend opportunities in blue-chip integrated energy/commodity stocks and ETFs enjoying higher spot prices, convertible debt that appreciates with the underlying equities it is tied to, as well as Business Development Companies (BDCs) and Senior Loan Funds that hold floating-rate loans, REITs that can raise rents and lease terms quickly, and Covered-Call Funds that are selling volatility back to the market in premier stock holdings.

Some due diligence and a good set of stocks, ETFs, and closed-end fund screening tools will show that generating an inflation-sensitive blended yield of 5% or more is well within the realm of probability for income investors seeking to ride the inflation wave and keep pace with the rising cost of living.

Consumer Confidence Index Rises

The S&P CoreLogic Case-Shiller National Home Price Index was released on Tuesday and through August, home prices in 20 major metropolitan areas rose 19.8% in the past 12 months.  When both home and stock prices are rising, consumers feel more confident.  As an example, the Conference Board on Tuesday announced that its consumer confidence index rose to 113.8 in October.  I was especially impressed that the Present Situation component rose to 147.4 in October and the Expectations component rose to 91.3.  In other words, consumers feel good about both their present situation and have high expectations for the future.  Obviously, this bodes well for retail sales and the upcoming holiday shopping season.

January Effect

This is a good time to remind all investors that November is a seasonally strong month.  Thanksgiving is generally viewed as a happy time of year when we gather with family and friends.  This feeling of goodwill often “rubs off” on investors, which may explain why there is often an early “January effect” that is boosting small-capitalization stocks.  After publishing for 40+ years, I remain amazed at how small-capitalization stocks often surge this time of year.  

Heard & Notable

A survey by Ipsos Group reveals that doctors are the most trusted people in the world, with a net trust level of 54 percent. Politicians have come out as the least trustworthy group of people with a net score of -52 percent. Source: Statista