The chart below was compiled by Bank of America research. It shows the performance of deflationary assets vs. those which are inflationary since 1960.
For most of the past decade, as technology companies increased our productivity and China exported deflation to the Western hemisphere, inflationary pressures were suppressed. Hence, deflationary assets outperformed inflationary assets, but that is starting to change. Here is why:
- Covid broke supply chains which increased the cost of materials (ask anyone who is doing a home renovation project how much the cost of wood, cement, or tiles has gone up). PC Richards is telling me it is going to take six months for my new stove & fridge to arrive. I ordered them in January, and they anticipate a late June delivery because the manufacturer cannot get the parts to build the products. The worst part is that I am expecting my third child in late June. Good times!
- The Fed (in my view) is trying to engineer some inflation as they have missed their target for the past decade (a little inflation isn’t bad, by the way). The cynical side of me says they are trying to move rates higher to push some investors back within the risk curve. When I hear NFTs of tweets are being sold for $2.5 mln and vintage sneaker sales are reaching $40-$50k, I know we are in trouble (i.e., rates are too low and people are way out on the risk curve). Given that the US economy is on a strong trajectory with tons of stimulus being injected into the system, I find it hard to believe that our interest rates won’t continue to climb higher. From a non-economic and selfish standpoint, I simply think investors should be able to park their money risk-free and earn 2-3%. I think the Fed is cognizant of some of these attributes and is willing to let rates rise further.
Also, I have been tweeting (for some time) that I thought commodity equities would have a relatively good year. In the same vein, I have poked some fun at the disruptive growth space. Check out the tweet below.
You can follow our firm’s research and sporadic tweets on Twitter via @astoriaadvisors.
Full disclosure, Astoria has thematic stock & ETF portfolios that capture both disruptive growth and inflationary themes, and I have my money in both strategies. I simply think that in 2021, commodity equities will outperform disruptive growth stocks on a risk-adjusted basis. In the long run, disruptive growth stocks may do better, but I think it is a tough go in the immediate period as super growthy companies are being re-rated given the rise in interest rates. Once rates stop going parabolic, I think disruptive growth companies can resume their relative outperformance.
Past performance is not indicative of future results.
Originally published by Astoria Portfolio Advisors
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