Taking the Measure of Inflation | Lord Abbett
Image alt tag

Error!

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Tracked Funds

You have 0 funds on your mutual fund watch list.

Begin by selecting funds to create a personalized watch list.

(as of 12/05/2015)

Pending Orders

You have 0 items in your cart.

Subscribe and order forms, fact sheets, presentations, and other documents that can help advisers grow their business.

Reset Your Password

Financial Professionals*

Your password must be a minimum of characters.

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

 

Market View

Amid recent headlines about supply squeezes and price pressures, our experts offer some useful perspective for investors.

Read time: 3 minutes

With the U.S. economy rebounding from the body blows of the COVID-19 pandemic, investors have wondered if the rapid rate of growth in gross domestic product presages a sustained rise in inflation. In this Market View, adapted from the cover story of the July 2021 issue of Lord Abbett Insights, we asked Giulio Martini, Lord Abbett Partner and Director of Strategic Asset Allocation, for his perspective.

It’s important to understand that inflation is not an event. Inflation is a process that has many steps and unfolds over a long period of time.

So why are investors worried about inflation right now? What is it in the environment that’s upsetting some people? I think it all ties back to significant imbalances in the U.S. economy resulting from the COVID-19 outbreak. They’ve arisen because we have some very serious mismatches coming out of the pandemic.

The most important one is a mismatch between the demand for labor, which is coming back very quickly, and the supply of labor, which is returning much more slowly, because of factors like early retirements triggered by COVID-19, healthcare concerns, and family considerations before school reopenings. Expanded unemployment insurance payments have also played a part. That mismatch is creating a lot of upward wage pressure (Figure 1).  Wage inflation normally moderates after economic downturns, as it did following the 2008-09 financial crisis, but it appears to be picking up in the current recovery. This aligns with widespread anecdotal reports of labor shortages by employers and ease in finding jobs by households.

 

Figure 1. Amid the Reopening, U.S. Hourly Earnings Have Risen Sharply
Change in standard and sector-weighted U.S. hourly earnings, March 31, 2007-June 30,2021

Source: U.S. Federal Reserve Bank of St. Louis FRED database. Data as of 06/30/2021. For illustrative purposes only.

 

Another big factor is upward pressure on house prices. We had a shortage of housing before the pandemic. But COVID-19 has really increased the demand for housing very quickly as people have moved. And so, house prices have started to go up very significantly. Rising house prices lead to rising rents down the road, and rentals account for one fifth of the U.S. consumer price index (CPI).

As of this writing, the U.S. Federal Reserve (Fed) does not believe we are facing a serious threat of long-term inflation. What they think we’re having is a temporary period in which inflation goes from the roughly 2% pre-pandemic level up to 4% or 5%, as the economy processes some short-term supply/demand imbalances. We think the Fed’s view is that this year and in early 2022, the short-term price pressures will ease, and the CPI will come back down to 2%. That’s not a “regime change” for inflation. Since the Fed believes higher inflation is temporary, it hasn’t even started rolling back any of the stimulus that was put into place during the pandemic. And the markets and investors seem to agree with the Fed for now.

Of course, there is always a risk that the Fed could be wrong, and that inflation turns out to be more persistent than what investors are expecting now. A sharp increase in spending triggered by the cumulative effect of the U.S. stimulus programs could turbocharge demand—and could create a longer period of high inflation than the market expects.

Takeaways for Investors

That said, we will repeat our earlier assertion: Inflation is a process, not an event. As such, we believe it’s too early for investors to consider substantial changes to their portfolios to prepare for a significant, sustained rise in inflation. Even if that does happen, history shows that the beginning of an inflationary process doesn’t have to be terrible for the markets. For example, inflation started to accelerate in the mid-1960s, but the U.S. stock market was largely unaffected and reached an inflation-adjusted high in 1971-72. So, there were five or six years of inflation picking up gradually before it became threatening enough for the market to respond negatively.

We think the lesson here is that you don’t want to be exiting riskier assets such as high yield bonds or stocks at the beginning of a potential pickup in inflation. Any potential portfolio moves should only be considered at the point where the inflation becomes high enough to be threatening, and in our view, we are nowhere near that juncture.

The bottom line: We think investors shouldn’t overreact to the potential for rising inflation by making sudden and significant changes to their portfolios.

 

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

No investing strategy can overcome all market volatility or guarantee future results.

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

Market forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

Equity Investing Risks

The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies.

Fixed Income Investing Risks

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. 

The credit quality of fixed income securities in a portfolio are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an  issuer’s creditworthiness.  Ratings range  from ‘AAA’ (highest) to ‘D’ (lowest).  Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.

This material may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The views and opinions expressed are as of the date of publication, and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions and Lord Abbett disclaims any responsibility to update such views. Lord Abbett cannot be responsible for any direct or incidental loss incurred by applying any of the information offered.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

Please consult your investment professional for additional information concerning your specific situation.

Glossary Definitions

The U.S. Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.This material is the copyright © 2021 of Lord, Abbett & Co. LLC. All Rights Reserved.  

Important Information for U.S. Investors

Lord Abbett mutual funds are distributed by Lord Abbett Distributor LLC.

FOR MORE INFORMATION ON ANY LORD ABBETT FUNDS, CONTACT YOUR INVESTMENT PROFESSIONAL OR LORD ABBETT DISTRIBUTOR LLC AT 888-522-2388, OR VISIT US  AT LORDABBETT.COM FOR A PROSPECTUS  WHICH CONTAINS IMPORTANT INFORMATION ABOUT A FUND'S INVESTMENT GOALS, SALES CHARGES, EXPENSES AND RISKS THAT AN INVESTOR SHOULD CONSIDER AND READ CAREFULLY BEFORE INVESTING.

The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Income from the municipal bonds held could be declared taxable because of changes in tax laws. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

Important Information for non-U.S. Investors

Note to Switzerland Investors: This is an advertising document.

Note to European Investors: This communication is issued in the United Kingdom and distributed throughout Europe by Lord Abbett UK Ltd., a Private Limited Company registered in England and Wales under company number 10804287 with its registered office at Tallis House, 2 Tallis Street, Temple, London, United Kingdom, EC4Y 0AB. Lord Abbett UK Ltd (FRN 783356) is an Appointed Representative of Duff & Phelps Securities Ltd. (FRN 466588) which is authorised and regulated by the Financial Conduct Authority.

MARKET VIEW PDF

 

    Market View

RELATED TOPICS

ABOUT THE AUTHOR

image

Please confirm your literature shipping address

Please review the address information below and make any necessary changes.

All literature orders will be shipped to the address that you enter below. This information can be edited at any time.

Current Literature Shipping Address

* Required field