The stock market had a rally on Tuesday for a very specific reason: the inflation data came in low and, at this point, its becoming increasingly likely that the Fed will cut interest rates later this year. A reduction in rates could fuel the somewhat sluggish growth rates we’ve seen throughout the economy for the past few quarters. And while all different types of economic data have an effect on the stock market, inflation is perhaps the most carefully scrutinized issue. If today’s reading of the consumer price index had come in even slightly higher than market analysts forecasted, we may have seen a big correction (drop) in the Dow Jones Industrial Average. Instead, the Dow is trading at yet another all-time high.
The inflation data showed that consumers paid, on average, .4% more for goods in April than they did in March. However, if we exclude food and energy, consumers only paid .2% more in April. FYI: the reason we view “core” inflation separately from total inflation is that food and energy prices tend to be more volatile than the price of a movie ticket or meal in a restaurant. Thus, economists take two different readings of inflation to get a more accurate, big picture view of price fluctuations. Energy, as we’re all aware, has been the most important inflationary concern for American consumers over the past few years. This idea of “specific inflation” leads me to my (hopefully) brilliant idea for the month.
Equitize your Costs
I did an interview for my blog last week with an investment expert named Jeffrey Feldman. Jeff was talking about problems with the healthcare system in the United States–specifically how we tend to treat symptoms rather than the actual problems which could potentially cure the symptoms. Whether or not this concept is true and is a giant conspiracy on behalf of an ultra-profitable healthcare industry is a different discussion.
Jeff pointed out an interesting way consumers can hedge themselves against higher costs related to long-term care insurance, nursing homes, etc. While he was talking about healthcare, his ideas can be carried over to the energy sector, financial sector, etc.* The idea is to “equitize” your specific inflationary concerns by purchasing a basket of stocks in the sectors which you’re most concerned about. For example, if healthcare and energy are two areas where you tend to spend money, purchasing stock in various companies which sell healthcare and energy products may appreciate in value enough to offset your longer-term costs. Does that sound nuts? Take the following example: the price of crude oil in the commodities markets have appreciated at roughly 10% since January. The price of gasoline–which is closely related but not exactly the same–has increased about 12% in the same time frame. Had you purchased a $3,000 position in crude oil through a basket of securities, you may have returned approximately $300 on your investment since January. In the same four months, assuming you fill up on about five times per month, your gasoline costs would have jumped about $35/month, or $140 over four months. In this scenario, you would actually be benefiting from the increase in gasoline costs. Perhaps then you’d start hoping for gas to move up to $5 per gallon.
As always, feel free to contact me with questions or comments about any financial planning issue. Please note: Past performance is not an indicator of future results.
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* Sector investing may indicate a higher level of volatility than investing in a broad basket of stocks.