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ArticleInflation is high – could consumer optimism make it worse?

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Lewis AltfestBy Dr. Lewis Altfest, CFA, CFP®, CPA, PFS, Ph.D., Chief Executive Officer, Altfest Personal Wealth Management

We all know that inflation is at a 40-year peak and that the Federal Reserve is rapidly raising interest rates to try to contain that while slowing economic growth. It’s a very different scenario from the low rates and vigorous expansion we’ve experienced for more than a decade.

Think about it: What would you rather have today – a country with optimistic consumer spending that’s growing at a rapid pace or a country that is very negative about the future with spending slowing down?

The answer is the second choice. Why? When weighing optimism against negativism and steady growth versus rapid, greater demand for goods driven by optimism in an inflationary period just leads to higher inflation. This trap is potentially the most serious inflationary problem we have had since the 1970s.

At this point, with so many costs moving up and only a few, such as fuel costs and selected other commodities, coming down, the Fed has to be concerned that a mild slowdown is not going to work.  I think it likely will raise rates more rapidly, maybe with the intention of creating the “r” word – recession – but never admitting it.  It may be necessary for the recession to bite over time to cure our inflationary problem through eliminating shortages.

How long will it last?

How long it will take to deal with inflation? It’s difficult to say. For example, nervousness on the part of consumers who look up to find that stocks continue to be weak may lock up their wallets quickly, causing an early recession, or, alternatively, stocks’ weakness could be ignored by other people with significant savings who will continue to spend.  On balance, a slowdown and a possible recession should occur within the next nine months. The optimists, of whom there are many, say any recession will be short, without much impact. However, too quick and we could be back with the same situation a year later.

What does our current situation mean for stock prices?

Assuming no big recession and realized projections of strong corporate profits, I believe stocks are largely close to being fairly priced right now. Yet there are a few caveats. First, stocks don’t usually stop at fair prices; they usually decline even more. Second, any further rise in bond interest rates is likely to create more competition with stock market investing. Finally, the stock market is mostly fueled by current and projected company earnings. Any significant recession, unless over very quickly, will bring those earnings – and stock prices – down further.

At Altfest Personal Wealth Management, we continue to believe in value investing, which allows us to purchase quality company stocks at lower prices and hold onto them for the long term. Amid this year’s changing conditions, we’ve made efforts to protect our clients’ portfolios from soaring inflation, climbing interest rates and a volatile stock market by reducing risk and using independent ideas to aim for portfolio growth.

Inflation may have peaked, helped by the decline in energy prices, but getting inflation back down below 2% a year without a deep recession will be very difficult.  I see a more mild recession and inflation leveling off over time at over 2%.

Find out more

If you have specific questions or concerns about how inflation may affect your investments and your financial goals, please book some time for a complimentary consultation.

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