Recs

6

Inflation Fears Are Back Again

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

For years, investors have expected that an increase in interest rates was imminent. With bond rates falling to record-low levels, it appeared that they had nowhere to go but up. Fast-forward nearly four years later, though, and the Federal Reserve's reduction of the Fed Funds rate as low as it could go hasn't succeeded in jump-starting the economy back to its pre-crisis turbocharged levels.

The silver lining of low rates and a weak economy has been that inflation has largely been in check. But with the Fed's latest round of quantitative easing, investors are now convinced that inflation is about to rear its ugly head. And more important, they're putting their money where their mouths are. Let's take a look at how investors are getting ready for inflation.

What the market's telling you
Last week's QE3 announcement played havoc with financial markets. For stock investors, the news was almost universally positive. But the bond market told a much different story.

In one part of the bond market, rates on regular long-term Treasury bonds soared and bond prices tumbled as traders grasped the magnitude of the announcement and the dedication of the Fed to bring about economic growth whatever the cost. Given that investors had used Treasuries as a safe haven to park money that they might otherwise have earmarked for stocks, greater optimism about the stock market brought about a corresponding exodus from bonds. Perhaps the best sign of this was movement in the bond-bearish ProShares UltraShort 20+ Year Treasury ETF (NYSE: TBT  ) , which climbed more than 5% in a single day last Friday in response to the big move.

Yet one oft-ignored niche of the bond market went the opposite direction. Treasury inflation-protected securities, also known as TIPS, whose face value is tied to inflation by means of the Consumer Price Index, soared in value, with inflation-adjusted interest rates actually falling substantially on the day. The iShares Barclays TIPS Bond ETF climbed more than 1% during the final two days of last week. Investors were so hungry for inflation protection that they bid the real yield on the 20-year TIPS down into negative territory, meaning that they were willing to accept a guaranteed loss of purchasing power just to get a measure of protection against rising prices.

Other warning signs
Bonds aren't the only investments out there pointing to at least the possibility of higher inflation down the road. Gold, which many use as a hedge against inflation, soared last Thursday, with SPDR Gold (NYSE: GLD  ) jumping about 2% as the bullion-owning ETF climbed in sympathy with spot gold prices. Central Fund of Canada (NYSE: CEF  ) , a closed-end fund that owns a combination of gold and silver, saw even more impressive gains of about 3%.

In fact, inflation may well have been responsible for a decent part of the gains in the broader stock market, especially among large-cap stocks. Powerful companies with loyal customers and valuable brand presence are often an excellent way to hedge against potential inflation, as these companies have the most pricing power and are better able to pass on any higher input costs to consumers rather than having to accept tighter margins and eat those costs themselves. For instance, both Starbucks (Nasdaq: SBUX  ) and McDonald's (NYSE: MCD  ) passed on higher costs for coffee and food ingredient prices to customers by raising menu prices, a move that less dominant players in the industry can't do without the threat of losing critical market share.

The evidence isn't totally conclusive, though. One contrary sign against inflation is the price of oil, which initially rose after the QE3 announcement but has since fallen well below its pre-announcement price.

Keep your eyes open
Even though the jury's still out, inflation fears seem to be getting back on everyone's radar screen. Be sure to keep your eyes open to the impact of higher costs on the businesses whose stocks you own, and consider the effect of inflation whenever you make an investment. When inflation finally does make its comeback, you'll be glad you did.

Stocks with solid dividends can be good inflation fighters, especially if they have products people really need. Check out the Fool's popular special report highlighting nine dividend paying stocks to secure your future to get some good ideas for your portfolio. This report is free to you for a limited time, so click here to claim your investing edge.

Fool contributor Dan Caplinger thinks he's as ready for inflation as he'll ever be. You can follow him on Twitter @DanCaplinger. He owns shares of Central Fund of Canada. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of McDonald's, as well as writing covered calls on Starbucks and writing puts on ProShares UltraShort 20+ Year Treasury. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy gives you nothing to fear.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2024791, ~/Articles/ArticleHandler.aspx, 10/1/2014 4:40:38 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated 7 hours ago Sponsored by:
DOW 17,042.90 -28.32 -0.17%
S&P 500 1,972.29 -5.51 -0.28%
NASD 4,493.39 -12.46 -0.28%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2014 4:03 PM
MCD $94.81 Down -1.41 -1.47%
McDonald's CAPS Rating: ***
SBUX $75.46 Up +0.19 +0.25%
Starbucks CAPS Rating: ****

Advertisement