2 Strategies for Investing During Record-High Inflation

Are you worried about your stock portfolio's performance during record-high inflation? In this segment of Backstage Pass, recorded on Jan. 12, Fool contributors Trevor Jennewine and Rachel Warren discuss their personal strategies for investing during this inflationary period and some recent updates from the consumer price index. 

Trevor Jennewine: It's that scenario where tough times tend to make good companies even better. They tend to, I guess, separate the wheat from the chaff. I'm not really making any changes.

I was going to throw up a chart real quick that shows The Labor Department's numbers going back to 1982. If you take a second to go through all of these numbers. We have 7.1% down here for the most recent figure.

The last time it was that high, it was June of 1982. Like you mentioned, Rachel, it's been 39, 40 years. I think based on looking at this, I think inflation is temporary.

If we consider the recent past where we had the coronavirus causing business closures and that spiraled into manufacturing and logistics bottlenecks. At the same time, the government sending out stimulus checks, the Fed's buying back treasury bonds and mortgage-backed securities to stimulate the economy.

So, you end up with that situation where you have people that have extra spending power, but there's not as many goods and services for them to buy, and that's, I think, a big cause behind the current inflation. But all of those things are going to work itself out.

I think the supply chain situation will continue to moderate over time. I think the Fed's plan to raise interest rates this year will cause the contraction that they're looking for. That being said, in the meantime, rising interest rates do make it more expensive to borrow money. I like what Jamie said about looking for pricing power.

In addition to that, I might be a little more cautious around companies that aren't generating positive free cash flow just because they might need to raise capital by issuing debt.

Other than that, I'm not going to sell anything. I do believe that there's more downside risk for some of those high-growth, low-profit margin stocks right now. But my philosophy is to look out a decade or two and to invest in companies I think will be worth significantly more over that time horizon.

Rachel Warren: Absolutely. Great points from both of you, guys. I think that investors are paying close attention to inflation because, obviously, it can have a mixed impact on stocks depending on the types of companies you're looking at. For some companies, there's been a lot of downward pressure on those stock prices.

But for me, and I know we talk about this a lot on Backstage. If you're looking at a company and the business is still looking good, its total addressable market is still solid, and the underlying strength of the business holds true, it really is a great opportunity to buy on sale.

But admittedly, it can be hard to be patient. Emotions can get in the way and then sometimes cloud our judgment as investors. I think more than ever right now, especially long-term investors, investors who are in it for three to five years, 10 years, 15 years holding onto a company really have to be looking at that long-term time horizon, and not just on the movements of the market or your favorite stocks over a few days, or weeks, or months.

I've been noticing a lot with my own portfolio. I have some of my favorite stocks that will be up by 5% one day, and down by the same amount the next day. They're just been back and forth.

That price fluctuation has nothing to do with the underlying business. It's not like anything big has hit the news waves. It's just what we're seeing in the market right now. I was happy to see, if happy is the right word, that these figures were right in line with what economists were predicting.

To Jamie's point, I think stability and predictability are key here and very much impacting how the market's responding, how companies are planning to operate within this challenging business environment.

It was interesting because I was looking at some of the key numbers as well from this report. We know that used vehicle prices have been one of the areas where there's been tremendous inflation.

Those prices rose 3.5% in December. Year-over-year, that was up about 37%. What was interesting, though, on a more positive note, was that energy prices were mostly down for the month. Fuel oil was down about 2.4%, and gasoline fell 0.5%.

As a whole, the energy sector, that was up 29% year-over-year in terms of prices. But we are starting to see month-to-month some steady declines. It's interesting because we were hearing this term transitory inflation being tossed about for a long time. I haven't really heard a lot of people say that in a while. I think maybe that term has been somewhat retired.

But I do think what we're seeing is that there is a very gradual retraction in some of these inflated prices. I think that's going to be far more likely the trend we're seeing in the coming months, not necessarily some incredible drop month-to-month, but just a stable and steady decline in those inflated prices.

I think that there was definitely some positive things to glean from this report. But also, just as a takeaway, the fact that it met expectations. I think the market responded positively to that as a whole.

I would say one stock that I have been looking at for a while that I think is a great one to consider if you're wanting to invest in more stable, consumer staple stocks. These aren't going to be super high-growth companies, but they can help to lend some stability to your portfolio. One to maybe consider is Procter & Gamble (PG 0.91%).

This is a company that has raised its dividend every year for 65 years in a row and counting. Shares are only up about 16% over the past year but nice dividend of about 2.2%.

Also looking stocks in the healthcare industry as well. Again, not usually super high-growth companies.

But you can definitely find some really stable value plays there if you're looking to balance out perhaps some of the higher-growth tech investments that you have.