The Fed Doesn't Have Inflation Under Control – Here Is How You Need to Invest
When one of our readers asked if I had confidence that the Federal Reserve would get inflation under control heading into 2023, my answer was a direct "No."
The Fed is largely staffed with academics and economists who have never run a real business a day in their lives, much less invested money for clients. There are exceptions, but by and large, most of the Fed folks seem out of touch with the financial markets.
I'm sure they mean well, but the majority simply don't have the investment cred.
That's why I said back in May 2022 that despite the Fed seeming confident in its game plan to get inflation to a target rate of 2%, high inflation would be here to stay. And judging by the latest Consumer Price Index (CPI) data, that prediction still holds true.
While inflation is "cooling" from the 40-year highs we saw last summer...
It still came in at 6.4% in January, which is not only higher than the 6.2% expected but also still well above the Fed's target rate. Shelter costs – aka housing – were up 7.9% since last year, energy costs were up 8.7%, and food costs were up 10.1%. Energy and food are not included to calculate core inflation, and now the Fed is trying to spin "supercore inflation" as a new economic measurement that is less volatile because it excludes shelter, energy, and food costs.
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The Fed may not think it's worth keeping track of higher prices in those sectors, but the fact is, the price of renting a house, filling up your car with gas, and stocking your pantry IS important to the overall health of the economy.
As you can see from the chart below, service cost inflation also continues to rise, and I don't foresee it coming down significantly any time soon.
Again, I'm sure the Fed means well, but I'm not relying on a board of academics and economists who lack real-world experience for my financial well-being.
And neither should you.
In my 35 years in the financial markets, I've seen it all, working with real people and helping them make money, and I can continue to help you navigate everything that is happening and be in your corner.
Part of being a savvy investor in this whipsaw market involves owning inflation-resistant stocks that give you income in the here and now through dividend payouts.
By generating income and owning the companies that will be rewarded for their sound financial performances, you are better equipped to keep up with the high prices for goods and services — and less likely to see your hard-earned money dwindle away.
Inflation Preparation
Companies with great brands can handle higher costs because they can pass those costs on to consumers; people are willing to pay those higher prices because they won't trade off or trade down for another brand.
One of those companies is J.M. Smucker Co. (SJM).
It produces the Jif peanut butter and Smucker's strawberry jam for the PB&Js in the lunchboxes of schoolchildren across the country.
Its Folgers Coffee has an estimated 35 million drinkers, filling up their coffee cups to start the day or their travel mugs to power through the night shift.
And its Milk-Bone biscuits are the treat of choice for many a beloved dog.
It currently has a dividend yield of 2.79% and was recently crowned a Dividend Aristocrat.
Another company with great brands that also pays its shareholders a dividend is Anheuser-Busch Inbev (BUD).
All across the world, at any moment of the day, people are drinking Inbev products in bars, picking them up while getting their groceries, or buying them in a nearby liquor store.
In addition to Bud Light and Budweiser, InBev brews over 500 beers, such as:
Beck's
Corona
Hoegaarden
Michelob Ultra
Modelo
Stella Artois
As of 2020, InBev dominated the global beer market, with Bud Light, Corona, and Michelob Ultra as the three top-selling beers.
However, the company is not hanging its hat on just its traditional beer lineup.
It's expanding into other categories, like nonalcoholic beer and spritzers.
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There are things people will trade down for — like a cheaper laundry detergent brand – but most folks aren't going to give up their favorite alcoholic beverage.
If BUD has to pay higher costs for cans and ingredients, Budweiser and Bud Light loyalists are less likely to trade off or trade down for different options; they want their favorite beer and will be willing to pay that little bit extra.
BUD currently has a dividend yield of 0.67%.
Bottom line: Inflation could continue to cool from record highs, but the point is that it is still high. That affects how people spend their money, and it weighs on the bottom line for every business. The companies with strong brand power — and faithful customers who are prepared to pay up for their favorite products — are the ones that will last even as costs continue to rise. Add in a dividend to sweeten the deal, and you have a great way to keep inflation from eating into your portfolio.
Good investing,
Mike Burnick Senior Analyst, TradeSmith
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The stock market may have ripped higher at the start of the year due to irrational exuberance, but it's starting to sober up.
And much like I warned about further inflation in May 2022... I'm worried not enough people are prepared for what is ahead.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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