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How Smart Investors Deal With Inflation

How Smart Investors Deal With Inflation

Posted On April 15, 2021 12:28 pm
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Inflation fears are back with a vengeance. With $6 trillion in fiscal stimulus and potentially another $5 trillion on the way, predictions of 4%, 6%, or even 10% inflation have started circulating on Wall Street.

This harkens back to the fears many investors had about QE-induced inflation in the early 2010s returning us to the 1970s. That was a period of stagflation and extremely turbulent stocks.

In fact, the S&P 500 suffered two bear markets in the 1970s and one in the early 1980s.

Here are the best available facts we have today, about what inflation risks we actually face, and how best to protect our nest eggs should inflation prove worse than expected.

What It Would Take To Bring Back Double-Digit Inflation

Moody’s is one of the 16 most accurate economist teams in the world, according to MarketWatch.

Moody’s chief economist Mark Zandi has crunched the numbers and estimates that the single biggest threat to getting back to 70s style inflation is 8+% earnings growth for 3+ consecutive years.

The reason is that inflation is basically a self-fulfilling prophecy. If companies and workers expect prices to rise quickly and every year, then wages have to rise fast to keep up.

Those wage hikes are passed on to consumer and business prices, creating a hard to break cycle of very high inflation.

In March 2021, wage growth was 4.2%. For context, 4% to 4.5% wage growth is considered healthy, because it requires 2% to 2.5% productivity gains to keep inflation at the Fed’s 2% long-term target.

In other words, there is so far little cause for concern to return to 70s style double-digit inflation.

Even If Inflation Did Soar, Investors Have Little To Fear

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About author

Dividend Sensei
Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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