Preparing your portfolio for a pandemic recovery

With 76.9m doses already administered, according to Bloomberg, the case for an economic recovery is gaining momentum. Another notable indicator is the inflation rate and nobody knows inflation better than the mortgage market. With the 30yr mortgage rate already up 12% to 2.97 since last week, per St. Louis Fed Reserve^1, the market is already facing the implications of the economic rebound and related inflation. Is your portfolio ready for inflation and does it have the right investments to take advantage of a recovery?

Inflation is a macroeconomic phenomenon when prices go higher. This is something the U.S. hasn't seen since 1980, after the gold standard was dropped and central banks assumed control over interest rates by issuing bonds (printing money). Declining interest rates over the decades effectively increased consumer demand, making the U.S. the consumer powerhouse that it is today. A drastically higher inflation rate can be worrisome as this can stifle growth. An out of control inflation rate, like in Venezuela, is disastrous. “The [inflation] rate reached 800% in 2016, over 4,000% in 2017, and about 1,700,000% in 2018,” per Wikipedia.

Nevertheless, noticeable changes to the market are taking place. With bonds facing bear-market territory and oil already up 140% since the bottom in April 2020, consumers are likely to face inflation, in an unfamiliar way. It will be noticeable as your living expenses will increase and even more noticeable as your portfolio will adjust, depending on its preparedness.

The pandemic crushed economic growth; “real U.S. GDP increased by 33.4% in the third quarter of 2020. This compares to an increase of 2.4% in the fourth quarter of 2019, before COVID-19 started to spread around the world”, per Statistica. Unemployment in the U.S. ballooned to 14.7% in April 2019 and has since declined to 4.5% currently; although many people who have left the workforce are not included in these statistics.

A typical investment portfolio is likely to include only stocks and bonds, as this has worked for the last 50 years. “Looking at the S&P 500 for the years 1990 to 2019, the average stock market return for the last 30 years is 9.110%,” according to Sofi. This correlated inversely with declining interest rates since 1980 and has never been tested with any serious bout of inflation, until possibly now.

Inflation hedges might include real estate, silver, gold, and other hard assets. Low-interest rates are reflected in the mortgage market which propped up real estate prices all over the country. Higher rates might test the continued success of this market. Silver and gold are of limited supply and are favorites of hedge funds and traders; expect volatility. Treasury bonds that are inflation-protected are heavily supported by the Federal Reserve, as they continue to buy bonds to support the economy. Lastly, tactical currency exchange may serve as a stopgap while inflation adjusts higher; the dollar may prove valuable as US rates increase. A country’s currency often moves with local interest rates. A seemingly powerful addition to a portfolio, at the ire of socially responsible investors, is oil and energy. This asset class seems to be the most to gain from the expected inflation spike and should be considered as a tactical addition to a portfolio.

At Eureka Wealth Management, I help my clients prepare their portfolios for the pandemic recovery. I also do retirement income strategies, tax and estate strategies. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.

^1 30yr Mortgage Rate