by Bryan Perry

October 26, 2021

It was back in early April that Fed Chairman Jerome Powell was turning up the volume on his policy mantra that inflation is “transitory,” and price pressures would see relief in the near term. Six months later, inflation figures in the wage, commodity, finished goods, transportation, and consumer discretionary fields are still very persistent, with few reports of supply chain bottlenecks loosening up.

Inflation is still trending higher, and the Fed is set to begin tapering by year-end, sending bond yields higher, while the forthcoming Biden economic plan is sending a message of stoking inflationary pressures further. According to Briefing.com The 5y5y forward rate increased five basis points to 2.41%, overtaking its high from May. The inflation gauge is now at its highest level in seven years.”

And this number (2.41%) is still well below the current rate of inflation at 5.4%.

Five-Year, Five-Year Forward Inflation Breakeven Index Chart
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

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.

Most of the recent inflation dialogue targets raw materials, energy prices, wages, and shipping expenses, but there should be some attention paid to monetary inflation and just how the skyrocketing money supply and debt-to-GDP data could impact the dollar and interest rates going forward.

M1 Money Stock Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I’d like to believe the convictions of Powell and Yellen about inflation tempering, but the current data doesn’t support their optimism. That said, the stock market has shown that it can tolerate rising interest rates at these nominally low levels. When rates rise gradually, it is billed as an expression of confidence in the economic outlook. When rates rise quickly, however, it is viewed as a nervous expression of inflation pressures and the specter of the Fed being forced to raise rates to keep inflation in check.

It stands to reason that the market can withstand the 10-year yield challenging the 2.0% level by year-end as sector rotation continues to reward inflation sensitive stocks and ETFs that are benefiting from the economic upturn the most. For the income investor, there is plenty to do to ride the inflation wave of generating outsized yield and capital appreciation, but investors have to think a bit outside of the box.

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.

DB Commodity Index Fund ETF Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

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.

Fighting the Fed is usually not a good idea, but fighting the tape is never a good idea.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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Also In This Issue

A Look Ahead by Louis Navellier
The Global Economy is Rapidly Slowing Down

Income Mail by Bryan Perry
Inflation Sensitive Income is Back in Fashion

Growth Mail by Gary Alexander
Winter is Coming…Even in Sweltering New Orleans

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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