News & Our Thinking

Many economists use “core inflation ”as the best method to measure changes in prices because it excludes the more volatile changes in food and energy prices. Core inflation in September saw its biggest increase since 1982, jumping6.6% from the same month a year earlier. In August, the percentage increase was 6.2%. How do you invest during a period of high inflation? It’s a challenging question without easy answers. Four St. Louis area investment strategists offered their perspectives to the Business Journal.

JARED KIZER | chief investment officer | Clayton-based Buckingham Wealth Partners

Jared Kizer has studied what happens during the transition periods from low to high inflation.

“Generally, the things that tend to do relatively well in that period is a super-short list, with shorter-term inflation protected securities toward the top of the list. Commodities tend to do well, but the stock market and longer-term fixed income, just as we saw this year, tends to get hit badly,” he said.

The question is whether that transition from low to high inflation is ending. The financial markets have sent signals that it is, Kizer said, but that could change as more inflation data is released.

If the markets are right that inflation will moderate significantly from this year, that could be a silver lining for fixed-income investors, he said. The Federal Reserve aims for 2% inflation over the longer run. But if it only drops to 4% and camps there, that would be tough for shoppers, but possibly a “silver lining” for investors, Kizer said.

“Finally, fixed-income investors are seeing some light at the end of the tunnel where you at least have some hope that you will be earning interest rates above what inflation is going to be,” he said.

Dividend stocks are viewed as a hedge against inflation and also a buffer during market volatility. In the second quarter of this year, dividend payouts in the S&P 500 set a record despite rising interest rates, inflation and an economic slowdown, The Wall Street Journal reported.

KEN CRAWFORD | portfolio manager | Clayton-based Argent Capital Management,

Ken Crawford says a dividend stock strategy can be a popular choice.

“What we look for are companies that have a record of increasing their dividends and then have an investment-grade balance sheet so you have some safety or belief that they will be able to continue to do so,” he said.

Examples Crawford mentioned include:

General Electric (NYSE: GE): “It ties in nicely with the electrification of the world. They are a prime beneficiary of electrical infrastructure.”

Chevron (NYSE: CVX) and Pioneer Natural Resources (NYSE: PXD): “One of the things that many of the oil companies are doing that has changed is giving back pre-cash that they have realized to shareholders, instead of a former mentality of drill at any cost or grow production regardless of returns.”

Northrop Grumman Corp. (NYSE: NOC): “The world has become more dangerous, unfortunately, and that has helped defense companies.”

JOE TERRIL | president | Sunset Hills-based investment advisory firm Terril & Co.

At a presentation last month, William Emmons, a high-ranking Federal Reserve Bank of St. Louis official, presented three broad scenarios of how the U.S. can see a lowering of the inflation rate. Emmons said his “best guess” was that the U.S. will first endure a period of “stagflation” – a stagnant economy combined with persistent and widespread rising prices of goods and services – that could last up to a decade.

Joe Terril, president of the Sunset Hills-based investment advisory firm, Terril & Co., said a decade sounded long to him, but stagflation could strike over the next two years, especially if the Fed’s method of bringing down inflation doesn’t work.

Terril’s advice to investors is “to try to keep as much liquidity as you possibly can, stay very short in your durations. In our portfolios, we have about 80% in very short investment-grade rated bonds. By short, our average durations are just a touch over six months. The other 20% we still have in a few select stocks.”

If an investor can retain liquidity and stay short on investment-grade rated bonds, Terril anticipates there will be some good opportunities by the end of the year.

“The tax law selling season for most mutual funds ends Oct. 31 and a lot of the hedge funds end Nov. 30. There will be selling pressure because of that. If you look around at really good (stock) names and say, ‘it’s been a long time since some of these names have been bought at seven times earnings,’; That’s what I think will happen to stock prices,” Terril said.

MORITZ | head of Missouri and Kansas | J.P. Morgan Private Bank

Brandon Moritz said one of the casualties of high inflation is the “4% rule” used for planning retirement. It’s been in vogue since the early to mid-1990s, but no longer.

Economists had said in the first years of retirement, if you spent 4% of your assets and indexed that spending to inflation going forward, you’d be OK even amidst economic downturns.

“It’s time to toss it out the window,” said Moritz, saying the consensus earlier this year was that the rule should be lowered to 2% to 3%.

“Inflation has proved to be very sticky. There’s been nothing transitory about it. As well, the outlook for asset class returns is lower from our perspective. That environment of 30 years of interest rates coming down and inflation not being something to worry about seems to have changed,” he added.

The precise percentage of the so-called “burn rate” depends on several factors, depending on a variety of factors, Moritz said.

They include how much a retiree has in taxable versus tax-deferred and tax-free accounts; federal, state and local tax rates; financial commitments or aspirations beyond maintaining his or her lifestyle, medical expenses, and the age of yourself and your partner.

There are steps that retirees can take to optimize their funds, Moritz said.

“To the extent that you can hold tax-inefficient investments in tax-deferred vehicles like IRAs and annuities, that is a powerful tool. Those assets tend to be things like high-yield bonds, high turnover public equity strategies and also hedge funds,” he said.

 James Drew

Reporter