News

In the last two weeks, there have been worries about rising inflation in the United States. US consumer prices spiked 4.2% over the 12 months to April, up from 2.6% in March, the fastest increase since September 2008 and a long way ahead of the Fed’s 2% target. There are a few reasons for the sudden jump in inflation. The price of commodities such as copper and iron ore has soared. A semiconductor chip shortage and delayed new car production worldwide which has increased the price of second-hand motors. House prices are also soaring and in some countries, there is a shortage of workers.

The Federal Reserve has yet to act on the increased inflation; however, investors are concerned about how the stock market will react if the Federal Reserve does start to signal a tightening of monetary conditions. The Stock Market does not like inflation as it erodes the real returns from stocks; however, it is yet to be seen if April’s rise in inflation is the result of the economy getting moving again after being shut down since 2020 because of the Coronavirus.

The stock market has been volatile in the last two weeks as it is a forward indicator, meaning it is not pricing in what is happening today, rather it is trying to guess and anticipate what is going to happen later in the year.

When considering your investments going forward, if inflation remains high and bond yields increase this will be bad news for some sectors of the market such as technology stocks but good news for other sectors such as banks and oil stocks. As always diversification is key; however, there are certain areas in particular that you can look at when it comes to equity investing. Growth stocks have performed brilliantly over the last 10 years as low and falling rates disproportionately favour these stocks. A growth stock is a company that is anticipated to grow at a rate significantly above the average growth for the market and technology companies would fall into this category. However, if interest rates and bond yields rise, these companies are likely to be hardest hit because their future earnings will be scaled back by the higher interest rates.

There are stocks that can benefit from rising inflation, and these are called value stocks. A value stock refers to shares of a company that appear to trade at a lower price relative to its fundamentals. Value stocks have been performing better in recent weeks compared to growth stocks. Over the past month the energy, materials and financial sectors have led the S&P 500 Index. Technology has been the worst performer. Emerging-market stocks are also worth considering as many emerging market economies produce commodities and if the global economy is heating up, commodity prices should too.

If you are concerned about how the current stock market volatility and rising inflation will affect your investment or pension policies, contact your local Financial Advisor to review how your portfolio is currently invested.

Marie Carr MSc BBS QFA RPA is a Qualified Financial Advisor and Retirement Planning Advisor. You can contact her through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on marie@jfl.ie