January 26, 2022
Buckle Your Seatbelt
Inflation Update

When I wrote about inflation in our August 2021 newsletter, I was not overly concerned about the near-term impact on the economy or our portfolios. At the time, the market consensus, which we agreed with, was that “the current hike in year-over-year inflation is likely to be transitory.” Much has changed since then. For the year ending December 2021, consumer prices rose a whopping 7%—the highest rate of inflation since 1982. Gas prices are already at historic levels. Housing prices, which were already at record highs, are climbing. Prices for used cars and trucks are up an incredible 37.3% since January 2021, and new car prices are up ‘just’ 11.8% for same 12-month period. Even groceries are now 6.3% more expensive than they were at the start of 2021—and beef and pork have increased at more than double that rate. Consumers everywhere are feeling the pinch. 

Rising prices aren’t the only concern. The Fed has already responded, announcing the likelihood of “three to four” interest rate hikes this year, in addition to doubling the pace of tapering its asset purchases. So far, investors have been less than enthusiastic about the news, a sentiment that sent the rate-sensitive Nasdaq index into correction territory last week, and put pressure on all the major indices, including the S&P 500, the DJIA, and the FTSE. At the same time, Treasury bonds delivered a 6% decline, and the 2-year Treasury rate jumped past 1% for the first time in two years. For investors, there seems to be no obvious safe haven. 

The equation is nothing new. Inflation pushes prices up, which prompts the Fed to raise interest rates, which makes investors wary. While there is little consumers can do to minimize the impact of rising costs, savvy investors can take steps to combat the impact of inflation where possible and take full advantage of financial opportunities wherever they exist. If you are an LCM client, the good news is that your strategy is already designed to grow and protect your assets in any market—including a high-inflation environment like we’re experiencing today.  

Here are just a few traits of our portfolios to keep in mind moving forward:  

  • We design our portfolios for a wide array of outcomes.  
    Our objective is to grow and protect your wealth using a diversified, balanced portfolio. We never chase the latest ‘hot stock,’ and we don’t change our strategy based on short-term market shifts. Even during the recent and extended period of low inflation, we remained cognizant of inflation risk and continued to position our portfolios to hedge against inflation. That strategy is demonstrating its worth today. 
  • We take advantage of the benefits of alternatives. 
    To help balance and improve risk and reward for our clients, our portfolios include ~20% in alternative (or “multi-strategy”) investment funds that are not as sensitive to interest rate hikes as other investment vehicles, such as traditional bond funds. These investments (which lie outside the more typical asset categories) typically do not track the movement of the equities and bond markets, so they offer a unique ability to smooth the impact of negative market trends.  
  • We employ a lower-duration bond portfolio. 
    In this case, the term ‘duration’ does not apply to when a bond matures, but rather to how sensitive the prices of the bonds in the portfolio are to changes in interest rates. This is another tool in the portfolio that helps mitigate the impact of higher interest rates that go hand-in-hand with inflation. 

Working together, these approaches help ensure that our portfolios are not beholden to the low interest rates we have enjoyed for more than a decade. This does not mean, however, that we are turning a blind eye to the current changes in the market. While we are constantly researching and assessing the investment landscape to identify small adjustments that may help ‘move the needle’ where we can, the fundamental tenets of our strategy are not changing. The reason: these guiding principles enable us to position our portfolios to deliver optimal outcomes in every market environment—including this one. Our strategy is sound. 

Though it’s true that much has changed in the past 6 months, some things have remained very much the same. As I stated in August, “We are keeping our eyes on the numbers, analyzing long-term inflation projections, and adjusting our portfolios as necessary to help preserve your purchasing power, your portfolio, and your long-term wealth.” I stand by these words. Our mission has always been to grow and protect our clients’ assets. As Marr wrote when telling the story of our origins, “our team is committed to doing everything in our power to grow and protect your assets so you can breathe easy, no matter what the future holds. We will continue to strive to do the right things the right way.”  

So yes, buckle your seatbelt for the rocky road ahead, but know that your portfolio is designed to do its job—and do it well—and that adhering to your strategy is the best way to locking in your gains for long-term growth. And if you have any questions or concerns during the turbulence, we’re always here to walk you through the details.


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Principal & Senior Investment Officer

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