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The media has been hysterical about inflation pretty much all year. In April, they freaked out about a 4.2% rise in the Consumer Price Index. In May, they screamed when it hit 5%. According to the latest reports from October, it’s now hit a 6.2% high compared to last year, the highest gain since 1990.
Naturally, they’re panicking again. But you shouldn’t. Not yet.
If you’ve been following along, you know that I haven’t been too worried about CPI spikes, and the markets have backed me up on that. Even after the news broke on Wednesday, only specific stocks, like tech, moved lower, with several outlets reporting that investors are “shrugging off” the news.
Well, there’s a good reason for that. They’re keeping their eye out for the real threat, the one thing that could actually tank the bull market we’ve been enjoying for a while.
But a select group of stocks could see unusually high gains…
Inflation Is Here, but It’s a Non-Event for Stocks
I don’t mean to suggest that rising inflation rates won’t have any impact on you at all – we’re all feeling it at the gas pump and the grocery store. And it’s rough going if you’re trying to buy a car right now. I’ve been saying all along that these spikes aren’t transitory, like the Fed has been claiming for most of the year, but evidence of structural changes.
And especially given the continued supply chain crisis we’re going through, as well as the demand for higher wages across the board, it’s not going to go away anytime soon.
But I want to remind you that even though the media tends to treat inflation like a four-letter word, some inflation isn’t always a bad thing. In fact, it can be a sign of a growing economy and tends to be a bellwether for bank stocks. And if wage increases and overall employment keep pace, consumers can absorb rising prices without experiencing too much sticker shock.
Assuming we can overcome the unique challenges that COVID-19 has created, there’s every reason to believe that things will settle back down to a level of inflation that is at least manageable. And there’s every reason to believe that even if it gets worse, investors will continue to “shrug it off.”
But there is one thing coming down the pipe that could create a real problem.
Leave It to the Fed to Ruin a Perfectly Good Party
Futures traders are predicting an 80% probability of the Federal Reserve raising the federal funds rate by July 2022, with steeper hikes by the end of the year.
If that prediction comes true, it will have an immediate chilling effect on the stock market. One big reason we’ve enjoyed the run we’ve had for so long is because the Fed have been deliberately keeping interest rates low, with a top target of just 0.25% for most of the year.
When the federal funds rate is very low, it spurs borrowing from companies who need to take on some debt in order to hit their growth targets, which in turn feeds back into the stock market in the form of performance gains.
The moment those rates start to climb, especially if it’s a steep jump, it becomes more and more expensive for those companies to service that debt. That expense impacts profits, which means less value for shareholders, which means indexes take a tumble across the board.
That’s the thing that has investors potentially on edge, and why the inflation news hasn’t really caused much of a stir.
So ignore the CPI and watch those interest rates. When they spike, you’ll need to change gears and prepare to do a lot of selling.
Good Stocks Can Keep You in the Black
Across your portfolio, raise your profit targets, raise your stops, and prepare to get out of stocks when the bull stumbles. Rapidly rising rates will stop this market in its tracks, and there are trillions of dollars on the table for the taking.
And then, during the initial sell-off, use that opportunity to break back in and invest in stocks that will rise along with climbing rates, like…
- ProShares Equities for Rising Rates ETF (NASDAQ: EQRR)
- Bank of America Corp. (NYSE: BAC)
- Schlumberger N.V. (NYSE: SLB)
- International Paper Co. (NYSE: IP)
That last one even pays you a juicy 3.5% dividend yield as you watch it appreciate.
I’m making stock picks like this for my free Total Wealth readers several times a week – and they get my weekly Buy, Sell, or Hold videos, too.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.