Saturday , 18 November 2017


What Does Ongoing Low Inflation Mean for Investors?

There’s certainly no shortage of things to worry about right now related to the U.S. investing-4economy but one thing we’re not too worried about right now is inflation. So what are the implications for investors? Here are four.

So writes Russ Koesterich (http://isharesblog.com/blog/) in edited excerpts from his original article* entitled 4 Ideas for Today’s Low Inflation Environment.

[The following article is presented by  Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

Koesterich goes on to say in further edited excerpts:

Not only is inflation low, but the latest numbers show it’s actually falling and…inflation is unlikely to become a problem in the United States for at least another 12 to 18 months…namely:

  • ongoing anemic wage growth,
  • continued tepid bank lending,
  • soft economic growth in spite of the fact that the US economy is expanding, recent economic reports suggest growth has softened this quarter and
  • the surge in US energy production which has led to lower, more stable energy prices.

So what are the implications for investors of a continuing low inflation environment? Here are four.

1. Stick with stocks

With inflation low and falling, the Federal Reserve can afford to…[err] on the side of too much stimulus. This means that the Fed is unlikely to quickly remove monetary accommodation. This is probably good news for stocks, which I believe can continue to move higher over the next six to 12 months.

2. Still hold high yield

Continued Fed stimulus is also potential good news for high yield, at least in the near term. [While] there are few alternatives to this asset class for yield hungry investors one way to access high yield in today’s record low rate environment is the iShares High Yield Corporate Bond Fund (HYG).

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3. Maintain an allocation to gold, but consider keeping it small

Low inflation is likely bad news for gold. As inflation drops, investors are less focused on inflation hedges like gold. In addition, lower inflation and stable nominal rates mean that real interest rates are rising, which could hurt gold.

4. A bond market meltdown isn’t imminent

While I expect [interest] rates to rise this year, with the US economy slowly normalizing and the Fed likely to take its foot off the accelerator very gradually, rates should rise slowly.

The bottom line:

One silver lining of today’s slow growth environment is that inflation is unlikely to be a problem before 2015.

[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]

*http://isharesblog.com/blog/2013/05/22/4-ideas-for-today%e2%80%99s-low-inflation-environment/  (Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog; ©2010-2012 BlackRock. All rights reserved.)

Related Articles:

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Inflation_Deflation2

Are we headed for rampant inflation or crippling deflation? I believe that we will see both.  The next major financial panic will cause a substantial deflationary wave first, and after that we will see unprecedented inflation as the central bankers and our politicians respond to the financial crisis. [Let me explain why I think that will unfold.] Words: 1025  Charts: 3 Read More »

2. We Think Interest Rates are Making a Long-term Turn Upwards

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3. No Threat of Inflation This Year – Here’s Why

On the surface, policy settings around the world look very inflationary with large fiscal deficits and aggressively easy monetary policies yet it is hard to see inflation gaining any traction [with] global activity so weak and the monetary transmission process so impaired in many countries. There is more of a deflationary than inflationary tone to the economic environment and it does not look as if this will change any time soon.

4. What Will Cause Interest Rates to Rise? Will That Be Good or Bad?

Don’t get too worked up over interest on the national debt or what will happen when interest rates rise because, by then, we’ll likely be talking about ways to cool down the economy. [Why?] Because interest rates on US government debt are really a function of economic growth.  If the economy is weak the Fed will pin short rates to stimulate the economy and if rates rise it’s going to be a function of better days ahead. Words: 525

5. A Rise in Interest Rates Would Derail An Economic Recovery – Yes or No?

[While]… I am not currently predicting an acceleration in inflation [I believe]…that the risk of interest rate instability is very real [given that] core inflation is already above a key benchmark that the Fed has staked its credibility on,. It should be of concern to investors that, despite economic growth being so anemic and overall resource utilization being so low (including human resources), there is currently very little margin for error on the inflation front. [In this article the author  evaluates the danger that rising interest rates could potentially have on the U.S. economy.] Words: 2050

 

One comment

  1. Controlling credit allows the Big Banks to control our Nations recovery, they, not the FED or the Government are now in control of our future!

    THINK TOO BIG TO ME$$ WITH… – SeniorD

    BTW: The people in Mid-America are being raped by the Big Banks who are keeping interest rates too high, since they are getting their Fed money at almost zero interest…

    Our Leaders are enabling them and that needs to stop, if America is going to turn this economy around!
    +
    Where are the 2.5% home loans?
    Where are the 1.5% refinance rates?
    Where are all the homes that the Banks now own, yet are not “on the market”?