Inflation is here. Consumer prices, counting food and energy, jumped 4.2% in the last year.
That’s no longer news. But as Wall Street adjusts to our inflationary reality, the market headlines are shifting away from the Silicon Valley stocks that ruled the world last year.
And this is far from the end of the world. It is only the end of the “K-shaped” economy and investors’ addiction to government debt.
My subscribers did well in the old economy. We’re poised to do even better in the future.
Can Silicon Valley Stocks Stay Ahead of Inflation Amid 50% Higher Gas Prices and More?
Now, it’s here. Gasoline prices are up 50% in the last 12 months. As you’ve seen, the price of everything from lumber to copper to cement has surged in the home construction boom.
And that’s before any infrastructure deal makes its way through Congress to further expand demand for all these essential building materials.
I was going to build my son a basketball court this summer. Nobody has the concrete at a reasonable price. The contractors are booked for months to come.
To entice them into a new project, you need to offer a premium price. To accept that project, they need to hire more people and source the supplies.
Multiply that basketball court across the entire country, and it’s no wonder dollars don’t stretch as far as they did in the pandemic. And as vaccinations spread, the pent-up demand is only going to get increasingly released.
The Fed thinks that’s a good thing. Central bankers demanded at least 2% inflation as a sign that the economy is recovering.
But my son isn’t likely to get that basketball court this summer unless I’m willing to pay inflated prices. Investors are in a similar predicament.
Stock Multiples Anticipate Inflation
Here in record territory, the S&P 500 has swelled to command a lofty price of 21X forward earnings. We normally consider the market rich at a 16X earnings multiple.
However, in a world where the price of everything is rising, we should expect stocks to follow suit. And what’s exciting as an investor is that this is no longer a Silicon Valley phenomenon.
Inflating prices will ultimately be a drag on profit margins. For now, this feels more like growth than gravity pulling earnings down.
Companies coming out of the pandemic are lean and mean. The S&P 500 currently carries a net margin of 12.8%, higher than anything since the 2008 crash.
There’s room there to swallow higher costs and still show shareholders robust cash flow. Again, that’s a proposition we normally associate with Silicon Valley giants like Apple Inc. (NASDAQ:AAPL) and Amazon.com Inc. (NASDAQ:AMZN) working miracles with trillion-dollar scale.
But technology is still only 27% of the S&P 500. Now the reopening of the economy gives the other 73% of the market a shot at the spotlight.
I think that’s what’s turned the Nasdaq into such a drag on Wall Street lately. It’s not growth fears around tech stocks as much as tech stocks finally having real competition for investor attention.
The whole market is open for action now. That’s exciting. All we need to do is make sure our investments preserve our purchasing power in an inflationary world.
Treasury Is Still Trash
It starts with locking in yields to maintain cash flow. You need to stop buying Treasury bonds until the Fed is willing to pay you enough interest to stay ahead of inflation.
If you bought one-year bonds a year ago, you would have locked in 0.20% interest. Now that those bonds are maturing, the capital return only buys 96% as much as it did. You’ve locked in a 4% loss.
Want to do it again? The Fed is not going to raise interest rates any time soon. Buy stocks that pay bond-like dividends instead.
As I just told TD Ameritrade (watch the interview) and Reuters (watch the interview), you want at least 3%. That’s the long-term inflation rate across generations, counting the price shocks along with the quiet decades like the one we just lived through.
When the Fed relaxes enough to tighten, we can go back to bonds. For now, there’s just no point in accepting a 3-4% loss on that part of your portfolio just because you’re scared of stocks.
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Cannabis Corner: From Bounce to Bonanza
Some people say it took a fairly low-profile analyst realizing that Aurora Cannabis Inc. (NYSE:ACB) is a “buy” to get the cannabis stocks moving in the right direction again.
I don’t buy it. ACB was due for a bounce purely on technical reasons. We talked about that last week.
So, even if an analyst talks about dispensaries across Canada reopening, my long-term view hasn’t budged. I’m still bullish.
It is only a matter of diversification. Wall Street essentially left ACB for dead a month ago. Now, suddenly, it’s a star.
But in the background, the entire group of cannabis stocks I track is up a healthy 11% this week and has given investors close to a 50% return so far this year. That’s huge.
All you need is long-term conviction and the nerve to hang on when volatility turns against you. The right perspective helps as well.
One of the cannabis stocks in my IPO Edge was hurting earlier this season and it’s down almost 5% this morning. But it’s still up 47% across the last two weeks.
That’s a big enough uptrend that even a 5% lurch to the downside is barely a speed bump. Want to know the ticker symbol? You’ll just have to subscribe.
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