NEW ORLEANS – America’s scorching economy is melting. The Nasdaq is down and inflation is up, but unfortunately you can’t invest directly in it.
Will the economy cool even more? Turn downright cold? Nobody knows for sure. But what we do know is that investors can take steps to protect their portfolios in times of high inflation and rising interest rates. With proper planning, your portfolio can limit downside and even find pockets of upside in a slowing economy.
Here are a few tips :
- Ask your commodity advisor. As the only major investment category that has been positive year-to-date, commodities continue to gain. Agricultural commodities such as soybeans and corn, as well as energy, oil and gas, continue to see strong consumer demand despite rising costs due to inflation and stress of the supply chain. Consider a 5% allocation of your portfolios to commodities.
- But don’t forget to consider political risks. Energy companies, like Exxon Mobile, benefit from high prices for the oil they sell. But White House leaders concerned with climate change and other environmental issues may affect the value of energy stocks.
- Look for dividends. Look for mature companies that pay dividends, especially if they have a history of increasing those dividends. When the economy is hot and interest rates are low, people tend to be drawn to exciting new companies like Tesla or Facebook (now Meta.) But when the economy is cold, companies that don’t reinvest not massively in their businesses can return profits to the shareholders of the company. Now is a good time to revisit old reliable companies such as IBM and Philip Morris International.
- Avoid heavily indebted companies. Businesses that have large loans will have bigger bills to pay as rates rise, making it harder for them to balance their budgets. Instead, look for companies with little debt that can sustain profits with little investment. Some tech companies may fit this mold, especially if they have other features on this list.
- Look for companies with pricing power. Companies that have a strong market position and few competitors can raise their prices as needed. An example is an MLP (Master Limited Partnership) pipeline, which essentially transports oil from the well to distribution centers.
- Immovable. Mortgage rates have reached their lowest level, but remain near historic lows. Additionally, new home construction has trended below the rate of household formation since the 2008 financial crisis, so fears of excess supply are muted. If you buy now and get a fixed rate mortgage, your monthly payments will stay at that level. For a $300,000 loan, each 1% increase means an additional payment of $200 per month or $2,400 more per year. Real estate investment trusts (REITs) are also worth a closer look. Rising rents help fight rising rates. REITs have diversified into areas such as data centers and cell towers, beyond the former retail and office sectors that make up a lower slice of the market.
- Focus on value equity and international equity asset classes. Leaning, not overinvesting, in these areas during high inflation can be a good idea. A recent study by Equitas showed that these asset classes perform better in times of high inflation, possibly because both categories start at lower price-earnings ratios than the S&P 500. The story is not not a guarantee, but during periods of rising interest rates we tend to see price and earnings ratios flatten out.
As the Fed raises interest rates to counter the effects of inflation, the US economy will surely cool down. But with proper planning, you can ensure that your portfolio stays buoyant even if the US economy slows.