Over the past month or so, it seems every client we’ve spoken with asks about inflation and what are we doing about it in the portfolios. The jury is still out on whether or not the current rise in costs is ‘transitory’ or not. It depends on your timeframe, clearly, but higher prices do appear here to stay for now.

The U.S. home price index is up 20% over the last year (a record), which is a leading indicator of the cost of rent and the largest component (30%) of the Consumer Price Index that’s used to measure inflation.  Input costs (labor, materials, distribution) have gone up almost across the board, fueled by government spending along with supply chain bottlenecks. Those two don’t appear to be slowing down as evidenced by the latest infrastructure spending bill passed by Congress recently.

The US Federal Reserve is still keeping bond yields at all-time lows to stimulate growth, and the massive supply of money being forced into the economy has fueled the price of all risk assets to keep pace. Disruption creates opportunity, however. We believe our models are positioned well for the environment as the theme of inflation is one we started talking about back in April of last year as the government dollar printing press was just getting fired up. We continue to favor stock in companies with strong balance sheets, pricing power and revenue growth. In bonds we like shorter maturity over long maturities. Per our recent commentary, the Alternatives also continue to work which is a welcomed change given a long drought of underperformance.

Until the Fed decides it’s time to really reduce their emergency support for the economy and start raising interest rates, this formula should have a good probability of success.

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