From the desk of Vance Howard:
Inflation soared 7% in 2021, the biggest increase in nearly 40 years. The Consumer Price Index, which tracks the price of a broad range of goods and services, increased 7% from the year before in December. Younger consumers have never experienced this sort of spiraling inflation. The last time prices rose so quickly was in the summer of 1982, as it was cooling off from the double-digit increases of the 1970s. Another month, another big and broad increase in the prices paid by American consumers.
The HCM-BuyLine® is positive, and even with the volatility the trend is still up. The big jump in inflation is causing a lot of stress on the markets as seen by the nasty little selloffs we have been experiencing. What does it mean for the markets in 2022?
Inflation/supply chain news = volatility. But with 7% inflation that means you’re losing 7% a year if you’re sitting in cash, so how many people will continue to do that? Also, we monitor cash build up and it is big, there is a tremendous amount of cash on the sidelines.
Losing 7% in cash = a positive for stocks. The Fed is expected to raise interest rates at least three times this year to cool rising inflation, although many economists predict four rate hikes.
Rising rates drops the value/price of bonds = positive for stocks. Bonds will have a very hard time with a rising interest rate environment. I would hate to be a bond trader or manage a fund where all they can buy is bonds because it will be extremely stressful for that person. Their job will not be about making money, but about trying to lose as little as possible. They will need a lot of Xanax in the next 12-24 months because stress and anxiety will be their whole world. Bond investors will get very frustrated seeing their portfolios drop and look for other opportunities such as high-dividend or value stocks.
Vance Howard
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