In the last two weeks fears have been stoked about higher inflation. The CPI numbers for January showed that inflation has now exceeded the Federal Reserve’s target. Rising inflation has a history of being a hindrance to stock market performance. Besides this, it will quite possibly force the Fed’s hand into a greater number of interest rate hikes for this year. Taken together, these are negative scenarios for your retirement portfolio.
This is why you need a gold IRA. The yellow metal typically moves inversely to stocks and provides a hedge in declining markets like you saw in late January and early February. Gold offers insurance and protection during market turbulence. Now is a good time to learn what gold goes in an IRA.
Inflation Rising Faster than Expected
The CPI report for January revealed a surprise in this important data. Consumer prices in America increased by more than economists had expected for the first month of 2018. In particular clothing costs shocked analysts, as they shot up by the greatest amount in about three decades. The news caused both stocks and U.S. Treasuries to fall. Inflation has been one of the two main reasons given for the tumultuous equities markets in February.
It was not only the one category of clothing that caused the Labor Department’s Consumer Price Index numbers to rise by .5 percent for January. Economists had been looking for only a .3 percent gain. Clothing was the most damaging category with its 1.7 percent monthly increase.
Medical care also came in at .4 percent higher. Owners’ equivalent rent and rent each jumped by .3 percent over December’s numbers. Car insurance saw its highest advance since 2001 with a 1.3 percent jump. Energy costs increased by 3 percent while food gained by .2 percent.
Versus a year ago, the index rose by 1.8 percent which was also more than the 1.7 percent anticipated. Even taking out the volatile energy and food categories, the monthly core gauge surpassed economists estimates of .2 percent with a .3 percent print. From January 2017, this so-called core inflation gauge totaled 1.8 percent versus economists’ predictions of 1.7 percent estimated.
You can see from the chart below that inflation is once again on the rise:
The growing inflation numbers have raised concerns among investors that the Jerome Powell’s Fed will increase the interest rates at a faster pace than expected by analysts and the markets. Nathan Sheets is a one time Treasury and Federal Reserve official. The PGIM Fixed Income Chief Economist Sheets explained that this inflation report:
“gives me increased confidence that we are in a place where inflation is likely to be gradually rising more or less in line with the Federal Reserve’s forecast and consistent with an economy where we are seeing diminished slack, strengthening labor markets, solid growth.”
In other words, higher inflation will lead to higher interest rates in the near term. This is more likely the case as the core CPI has seen its three month annualized gain rise to 2.9 percent. Not only is this its fastest increase since the year 2011, it is well above the Fed’s two percent target inflation rate. With all items included in the figures, the primary CPI number was still up 2.1 percent versus a year ago. Forecasts were for only a 1.9 percent gain. December similarly saw a 2.1 percent CPI increase over a year prior.
Rising Inflation Numbers Strengthen Case for Fed Interest Rate Hikes
Both investors and economists were already anticipating a March Federal Reserve interest rate hike. The results of the January CPI figures could increase the number of increases and move up the timing on other interest rate boosts in 2018. Jerome Powell will be leading his first meeting as the chairman of the Fed from March 20-21 when they make this rate decision. By this time, the policy makers will have obtained the CPI numbers for February as well.
Jerome Powell has already given indications of where he is headed with interest rates when he spoke at his swearing in ceremony this month. He hinted that the U.S. Federal Reserve will move forward with interest rate increasing gradually. Powell claimed that the Fed officials will “remain alert to any developing risks to financial stability.” This last week of February the Fed chairman will speak at two events where he may elaborate on the concerns.
Wall Street traders continue to cling to hopes that Powell will not try to upset the markets with comments that come across as too hawkish. This is not a given though. Federal Reserve Governor Randal Quarles spoke on Monday, February 26th. He indicated strongly that this level of sustained higher growth could need there to be higher interest rates.
Inflation Greater Danger to Financial Markets than Rising Rates
The two main stories on why the markets corrected so sharply in late January and early February centered on inflation and higher interest rates. The two occurring together are often challenging for stocks. Inflation presents a more direct link to poor market performance though.
The world watches rising interest rates closely. Higher rates mean a greater expense for corporations borrowing money. This is a real concern for many U.S. companies that have become saddled with debt in the years of cheap and easy funds since the Global Financial Crisis of 2008. Besides the threat to corporations, higher interest rates create a greater competition for investors’ money. They are able to allocate to fixed income along with stocks when rates rise enough.
Inflation hurts stocks as it boosts the costs for materials and wages for companies. Corporations are not always able to pass higher costs on to their customers. This scenario causes corporate earnings to suffer. It becomes reflected in lower stock prices. The rising interest rates do not necessarily mean poor stock performance immediately.
Yet the conclusion of these periods of higher rates have sometimes happened at points in the stock market where equities massively declined. Interest rates were rising going into the Black Monday stock market crash of 1987 and the dot-com bubble explosion from early 2000. Following higher rates in the summer of 1990 a severe market correction of 19 percent occurred as well. Rising interest rates in 1966 led to a bear market.
Rising Inflation Has Been A Danger to Stock Market Performance
The effects of inflation on stock market returns have been more immediate. In the years running 1928 through 2017, if inflation remained under three percent for a year, the median return of the S&P 500 came in around 16 percent. In years when inflation topped three percent, this median declined to only 6.5 percent in a year.
The numbers are worse when inflation was rising. Those years that inflation remained below the prior year, median S&P 500 returns amounted to 18.3 percent for a year. When inflation topped the prior year, the same stocks’ median return came in around 5.6 percent.
This reminds you that inflation is a greater immediate threat to stocks than gradually rising interest rates. The two happening together (as seems possible for 2018) could pose a greater challenge for equities. It is yet another reminder of why you need to diversify your retirement portfolio away from only stocks.
Gold is the time-tested portfolio insurance that can help stabilize your returns in times of inflation. The yellow metal typically rises apace with higher prices. Now is the time to learn about Gold IRA rollover rules and regulations as well as to consider storage options.