This year, advisors are likely hearing plenty about the relation trade – a scenario that implies inflation is either here, or soon will be.
Turning to fixed income assets designed to contend with a rising Consumer Price Index (CPI) is an option, but there are other, stronger considerations, including the WisdomTree Core Equity Model Portfolio.
“This model portfolio is designed for growth-oriented investors with a long-term horizon looking to maximize long-term potential for capital growth through a globally diversified set of equity ETFs,” according to WisdomTree.
Currently, the Federal Reserve isn’t sounding the inflation alarms, but advisors should prepare for a rising CPI before that scenario arrives in earnest.
“Given that the Fed’s historical target rate for inflation is 2%, these headline numbers do not give much cause for alarm, especially since the Fed has signaled it believes any near-term increase is likely transitory,” said Scott Welch, WisdomTree chief investment officer – model portfolios. “The Fed has also indicated that it will allow inflation to run hot before stepping in, in order to pursue continued economic recovery.”
Will the Inflation Bell Toll?
Proper positioning of portfolios for inflationary times requires an understanding of the factors that actually drive prices higher.
“Three useful measures of wage inflation are: (1) the Employment Cost Index (ECI), published by the Bureau of Labor Statistics, which measures both wages and benefits at all levels of a company (and so it is probably the most comprehensive metric), (2) the Average Hourly Earnings of Employees, Total Private (since government workers are paid by the taxes on those earnings) and (3) Real Personal Income, Excluding Transfer Receipts (again, since transfer payments – social security, Medicare, Covid-19 relief, etc., are paid for by taxes on private sector earnings),” according to Welch.
Highlighting the allure of the aforementioned model portfolio today is that wages are rising because the labor force is tight following the coronavirus pandemic, prompting employers to pay up for much needed staff.
“The market likes a little inflation – it historically has been good for stocks. We will not be concerned until inflation rose to roughly 5% or above. But reflation is one of our primary investment themes for 2021 – we absolutely believe inflation is coming, and we suggest advisors and investors plan accordingly,” adds Welch.
For more on how to implement model portfolios, visit our Model Portfolio Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.