With Fed’s determination on raising interest rate to fight inflation, it feels lot a like the 70s and 80s since last year (2022). It’s not likely that inflation can come down to the 2% target anytime soon. With China reopening and the war between Russia and Ukraine still going on, and the U.S. China geopolitical tension, there seem to be a lot of uncertainty ahead. Since Fed Chair Powell announced their intention to raise interest rate higher than the original plan on Tuesday, S&P500 had a very bearish week, with SPY now trading below SMA200.
However, there is no need to feel anxious if you learn how to take advantage of stagflation and diversify your investment in asset classes that may benefit from this winter season we are going through. Here are four asset classes that investors may consider during this type of economic environment.
1. Cash and Cash Equivalents: cash and short-term treasury bills, can provide modest nominal returns during periods of economic uncertainty. As of March 9, 2023, 1 year treasury yield is 5.18%. This is considered risk-free rate. It’s a lot better than having all your cash just in your checking account because high inflation is going to eat away your purchasing power. You can purchase T-bills via Treasury website, or through your brokerage account.
2. Defensive Stocks: Stocks in defensive sectors such as healthcare, utilities, and consumer staples may perform well during both recessions and periods of inflation because they offer products or services that are considered essential. However, during the penalty phase, equity price is likely to go down further. Stay invested with dollar cost average method is the best way to go. This is also why having cash is very important during this phase so that investors can scoop up more equities when they get cheaper. State Street offers sector ETFs such as XLH, XLU, XLP to invest in these sectors.
3. Gold and Precious Metals: Gold and other precious metals are often seen as a hedge against inflation because they tend to hold their value well in times of rising prices. During a recession, gold may also perform well because it is seen as a safe haven investment.
4. Real Estate: Real estate investments can be a good option during inflation because rising prices often lead to higher rents and property values. During a recession, real estate investments may perform well because they tend to offer stable cash flows and can be less volatile than other asset classes.
It is important to know that, if you are not a finance professional, and your passion is not becoming a subject matter expert in investment, the best way to build and protect your wealth is to diversify your existing portfolio, have plenty of cash or cash equivalents on hand during the stagflation period so that where there is “blood” on the street, you can invest some assets that would be selling at a huge discounted compared to its intrinsic value. Each of the asset classes above carry its own risk. There is no absolute safe haven for anything in investments. Do your own research and homework before making financial decisions. Consult a licensed professional if you need advice or more information to help you make a more informed decision.
***My blogs are for education and entertainment purpose ONLY. They are not intended to serve as financial advice in any way. ***
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