Inflation, no longer deemed transitory, puts advisers in scramble mode

With inflation hovering at a 40-year high and now, for the first time in more than a year, being described as something other than transitory, financial advisers are realizing they can no longer just repeat the message out of Washington that there’s nothing to worry about.

“The best advice we have been giving our clients is to perform a review on their household budget,” said Zachary Bachner, an adviser and investment research analyst at Summit Financial.

“We recommend performing this review annually, but it’s even more important now since inflation is hitting the average consumer goods,” he said. “This task is especially true for retirees who are currently living on a fixed income. There may be tough decisions to make and it is important to focus on your necessities before your wants.”

In terms of investment portfolios, Bachner said it’s about turning to the workhorses.

“Commodities and associated companies such as oil refineries and distributors have had a fantastic year so far,” he said. “There are also inflation-protected bonds that offer a higher coupon yield with higher inflation rates. All of these options should perform well when inflation is high, but they may also underperform when we see inflation start to head lower.”

The Biden administration, along with Treasury Secretary Janet Yellen, acknowledged earlier this week that they had underestimated the underlying drivers and momentum behind inflation, which is now above 8% for the first time since the 1980s.

While some analysts offer the perspective that inflation is currently a global phenomenon, a closer look at U.S. policy shows fuel being poured onto inflationary flames in the form of a $1.7 trillion stimulus package and spending plans that overheated the economy.

“Heck yeah, it’s not transitory,” said Dennis Nolte, vice president of Seacoast Investment Services.

“Thank you, Ms. Yellen, but the horse has left the barn about 18 months ago,” he said. “Corporate and personal budgets are getting squeezed. Meaning utilities, consumer staples, energy and bonds might be a good place to be, since inflation isn’t generally awesome for consumers unless they are selling a home or an oil well.”

Finger-pointing aside, most financial advisers are now in damage control mode, helping clients traverse the kind of terrain that many of them have never seen.

“The fact that the Fed and the Biden administration are finally admitting fault tells me that the problem is peaking or has peaked,” said Paul Schatz, president of Heritage Capital.

“The inflation trade is very late in the game and advisers putting it in now are chasing their tails,” Schatz added. “I think bonds offer a huge reward-risk to year-end. It’s not a new strategy but I would also consider [Treasury’s Series I savings] bonds, which recently reset with an interest rate above 9%.”

Jon Ulin of Ulin & Co. Wealth Management, said he's following the classic inflation management road map.

“Our playbook for managing inflation risk includes a good amount of financial stock ETFs and funds in our core large-cap space that covers the gamut from national and regional banks to broker-dealers and credit card issuers that will directly benefit from higher earnings fueled by increased rate margins on loans and cash as the Fed continues to hike short-term rates,” he said. “This is in addition to investing moderately in commodities, industrials, materials and value sectors based on each client’s age, risk profile and investment goals.”

On the fixed-income side, Ulin said he “chainsawed down our bond duration closer to 1.5 years in January and continue to manage for interest rate and inflation risks by including mostly short-term investment-grade to high-yield bonds, floating rate, Treasury inflation-protected securities as well as a good dose of reinsurance catastrophic bond funds that pay 5.5% with a 1-year duration and low correlation to the major bond indices.”

Beyond the impact of inflation on investment portfolios, Tyler Martin, director of financial planning at Stonebridge Wealth Management, is telling his clients to mind their household balance sheet.

“Don’t keep too much cash on hand,” he said. “Certainly, everyone should ensure they maintain an adequate emergency reserve of three to six months, but excess savings are losing their purchasing power.”

And in terms of saving, Martin is advising his clients to “focus saving on the items that are inflating the most.”

“The inflation rate, as measured by the consumer price index, reflects a basket of goods, and not all things are inflating at the same rate, or are even weighted the same,” he said. “Housing and transportation are the primary drivers right now and represent 42% and 18% of the consumer price index, respectively.”