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What I Care About This Week | 2021 Nov 1

Photo by Polina Kholodova on

by Franklin J. Parker, CFA

The Summary

The Details

Earlier this year, I published an inflation playbook—a look at where inflation bites hardest and where it creates opportunity. Interestingly, as inflation has developed through the year, we have begun to see some of this play out. This is an indication that investors are repricing their inflation expectations in anticipation of it being with us for a while.

What should investors do, then, in an inflationary environment?

In general, bonds take a beating when inflation expectations increase. Of course, the bond market is a big place. High-quality, long-term bonds are typically the hardest-hit in such an environment. Floating rate bonds and short-term bonds usually hold up much better. A tilt away from the former and toward the latter is warranted in this environment.

For stocks, we typically see energy, commodity-producers, and financials benefit the most from rising inflation expectations. From a bigger perspective, we see a preference for small and mid-size companies over large companies, though large companies hold up fairly well. The caveat to this is technology, which may have trouble coping with higher interest rates, and technology is the biggest percentage of most large-cap indices.

Commodities, of course, perform well. However, gold, despite the popular narrative, does not move in response to inflation nearly as much as other commodities, like industrial metals, foodstuffs, or energy. Commodities are volatile, and it is difficult to gain direct exposure (most funds are based on commodity futures). Even so, an overweight to commodities is not unreasonable in this environment.

Of course, your goals will dictate which risks you should take on in your portfolio—these are only generalizations. But, keeping up with the big-picture is important during a time when the economy and markets are undergoing some big shifts.

Chart of the Week

This week’s chart comes courtesy of the Wall Street Journal, showing the share of the US population that is retired. As the chart clearly shows, Covid accelerated the number of retirees, bumping the number above the five-year trend. This is both good news and bad news. Bad news because it means there are fewer experienced workers in the workforce to help alleviate supply constraints and wage costs. It is good news because one central challenge over the past decade has been the inability of younger workers to move up in their careers due to older workers maintaining their senior positions for much longer. With older workers retiring, younger workers are now able to backfill those positions, and a sense of upward mobility can be maintained.

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