There’s certainly no shortage of things to worry about right now related to the U.S. economy 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).
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.)
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