Investors Should Keep Sailing but Scan the Horizon for Dark Clouds of Inflation

If you are worried about inflation from the increase in government spending initiated to help the economy rebound from the pandemic, you can still take advantage of the current economic surge. Normally, an investment strategy manages short-term risks to take advantage of long-term opportunities. This philosophy has now been flipped. For the purposes of this discussion, inflation means a long-term sustained growth in prices for goods and services, not a cost spike caused by a temporary commodity shortage. Commodity prices are surging right now, but that probably will abate in the next quarter or two as production increases and supply chains heal. Any sustained inflation is still two to four years away.

Today, the federal government is flooding the economy with cash to help it rebound from the pandemic-induced recession. This most likely will increase short-term company profits, personal savings and demand for investments. In other words, all that money should, in all likelihood, push markets higher.

But all the spending will probably create more demand for products than manufacturers can produce. That causes prices to inflate, which can hurt real and often nominal investment returns as companies and consumers struggle to keep up with surging prices.

So, with immediate demand pushing investments higher but longer-term inflation pushing returns lower, how does an investor approach this unusual market?

First, understand that inflation is like a Mack Truck. It takes a long time to accelerate and is hard to slow down. The market is like a Ford Mustang—it can zip around. The extra cash and spending in the U.S. economy will fuel both, but the sports car will race ahead while the truck groans and grinds its way to slightly faster speeds. In a couple of years, the sports car will overheat and be forced to slow down, while the truck continues accelerating.

In other words, AMG expects the stock market probably will do well in 2021 and into 2022. However, investors need to be prepared to shift strategies if inflation becomes a problem, finding assets less sensitive to its impact. Talk to your AMG advisor to make sure you don’t overstretch and take on too much risk while taking advantage of near-term opportunities.