David B. Winston, Executive Wealth Advisor of Winston Wealth Advisors
At Winston Wealth Advisors, transparency and communication are of utmost importance, as well as making time for clients to ask questions and address their concerns.
With that said, I wrote this article about inflation with two goals in mind:
- To provide you with the facts about inflation because, there is a lot of misleading and false information being spread online and on social media.
- To share some insight into why and how our team at Winston Wealth Advisors keeps a forward-thinking mindset. I have also attached a few related charts for visual learners.
So, let’s start by setting the record straight about what inflation is and why it matters to us in 2023.
What is Inflation?
In one sentence: In economics, inflation is a general increase in the prices of goods and services in an economy.
This translates to things getting more expensive to buy.
What Causes Inflation?
The reality is inflation happens in most years. It’s a normal part of free market economies that items and goods increase in cost over time. History and our own lives have shown that. So for the majority of the time, inflation is neither good nor bad; it just is. Interestingly inflation can be caused in a number of different ways:
Examples of some situations that cause inflation:
- Population Growth
- Shortages. For example, if gasoline is in short supply or there is an increase in demand above current availability, the price will increase at the pump.
- Hoarding (Too many people buying more than they need causes shortages)
- Inflation in foreign countries. The war in Ukraine increased inflation for European nations and the United Kingdom. They had to print money to fuel the war effort.
What happens when interest rates are low?
If the Federal Reserve sets too low of an interest rate, that can create higher demand than normal for products or services. Lower interest rates allow for better mortgage rates. Purchasing a new home, for example, becomes a more attractive option when the cost of borrowing is low.
What is the Federal Reserve, and What Does it Do?
The Federal Reserve System is the central bank of the United States. Its mission and design are to promote the effective operation of the U.S. economy and, in turn, the public interest.
The Federal Reserve System sets the U.S. monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates.
What does the Federal Reserve have to do with inflation?
The Federal Reserve has several tools in its toolbelt. One tool the Federal Reserve uses to control inflation is adjusting interest rates via the banking system. The long-term target rate of inflation is about 2%. If inflation is higher than 2% (as it is currently), the Federal Reserve will generally increase interest rates to slow down the economy to reduce demand for goods and services. This inevitably lower prices and reduces inflation.
Historical Fact: The Federal Reserve System increased interest rates six times in 1994 to prevent inflation. In 1995, the S&P 500 was up over 34%.
What effect does inflation have on the market?
Generally, it comes down to consumer spending. During the Covid-19 pandemic, we did not travel and spent less money on vacations and more on things around the house. The profits of hotel companies such as Marriott International significantly reduced, and the price of the stock followed. The situation was unprecedented. In March 2020, Marriott’s price per share dropped to $74. Since then, demand for vacations has rebounded, and Marriott’s earnings are up. Although Marriott has come down some since its April 2022 high, it still trades for about $140 per share, close to double what it was in April 2020.
Inflation Can Help Some Companies:
Some companies can benefit from inflation. For example, companies like Exxon generally do well as oil prices rise. As the price per barrel goes up, so do their profits, and the demand from consumers is not reduced.
More People Shop for Affordable Alternatives:
Another example of companies that historically benefit from inflation is the stores that attract consumers looking to save money and get a better deal. So, lower-cost retailers such as Walmart historically have seen a greater demand during inflationary periods.
How do fund managers invest during times of inflation?
When building a portfolio, a fund manager looks for the best companies to invest in for the long term, which means the next 3, 5, and 10 years. It is all about where the company is today and how they are growing. It is about future profits, but more importantly, it is about how much I have to pay today to participate in the company’s future earnings.
The goal of fund managers is to own a portfolio of great companies that earn consistent profits and are trading below their historical prices and what they are truly worth. This can provide more affordable purchasing points for companies that are still very strong or even stronger than before. It can be like a massive sale at the mall that only comes once every few years. The key is staying invested in order to benefit.
We like to focus on incorporating quality dividend-paying companies into our allocations. The aim is to utilize the power of these dividends, which often goes underestimated. One of the best parts of dividends is how they pay cash while we can patiently wait for the market to recover.
We view experienced asset management as crucial as ever. Winston Wealth Advisors has managed accounts during other inflationary periods.
How Indexes and the News Can Be Misleading
The news and finance talk shows, for the sake of simplicity, tend to focus their daily reports on large indexes like the S&P500 and the Nasdaq. However, because they are indexes, they can easily be skewed lower by a handful of underperforming stocks. So, it is misleading and difficult to gauge the economy on the ups and downs of indexes alone. The good news is that by not owning the entire index and being selective about the companies in your allocations, your holdings are more aligned with your long-term goals.
Strong Financial Plan and Portfolios: Designed for the Long Term.
The key to wise investing for long-term growth and steady income is sticking to your financial plan, which includes owning a diversified, properly allocated portfolio.
Thank you for allowing our team to serve you through these periods of history. We remain vigilant, resolute, and optimistic as we continue to work on your behalf.
Important Disclosures: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
