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Exactly When It's Time to Worry About InflationBy
Thursday, March 22, 2012
When do we start worrying about inflation?
The Federal Reserve keeps printing money. Won't that eventually create inflation... and cause all kinds of problems?
Won't inflation eventually crush the stock market?
The answer might surprise you...
Stocks can actually soar during inflation... for a lot longer than people think.
Stocks can do well even during wild bouts of money printing (hyperinflation), as Jeremy Siegel explains in the book Stocks for the Long Run:
Based on history, U.S. stocks have held up pretty darn well, even after inflation starts to rise.
It's a funny thing... companies think they're doing better, sales appear to be higher because of inflation, and so do earnings... So therefore, business looks good.
Looking at the data, though, you can see this only works to a certain point...
Over the last 50 years, stocks do well during inflation... until they reach an "uh oh" moment.
The "uh oh" moment happens when inflation touches 5%. When inflation reaches 5% in the U.S., stocks fall. Take a look...
 So when the 12-month inflation rate rises above 5%, it's time to get worried.
What happens at 5%? I don't know specifically... Maybe 5% inflation is the point when investors get scared that the Fed will get serious about whipping inflation. They get scared the Fed will dramatically hike short-term interest rates... which will slow inflation AND the economy.
Right now, inflation is at 2.9%. The Federal Reserve forecasts inflation in 2014 will be around 1.8%. The current survey of Wall Street economists (by Bloomberg) shows they believe inflation in 2014 will be around 2.5%.
In short, 5% inflation might be a long way off.
When we start approaching 5% inflation, it's time to consider making some changes... It's time to tighten your trailing stops. Sell the investments that have gotten expensive. And get ready to move out of some of your positions.
But we're not there yet.
Right now, I believe we're still in the "sweet spot" in stocks.
I believe we're in the "legitimate uptrend" portion of a bull market in stocks – the time when the big gains are made...
All the ingredients are in place for an incredible year in stocks (and most other investments, too). We're in the early innings of the Bernanke Asset Bubble I've been writing about for years now.
Don't let your fear of government money-printing lead you to bail out now. Based on history, as inflation rises, times will get much better in stocks before they get bad.
Good investing,
Steve
Further Reading:
Yesterday, Doc Eifrig told readers about his No. 1 protection from inflation. "These assets have the power to protect against inflation because they can grow your investment faster than inflation erodes it," he writes. Read more here: Gold Won't Protect You from Inflation... This Will.
Market NotesANOTHER "DOMINATOR" ENJOYS THE RUSH FOR DIVIDENDS While tracking the big "dividend momentum" idea, don't forget to include Coca-Cola...
Over the past few years, we've stressed the importance of dividends and high-quality stocks dozens of times in DailyWealth. We practically went to your house and made you buy them. Our colleague Dan Ferris even coined the term "World Dominating Dividend Growers" to drive the point home. In a world full of risk and fraud, getting paid steady and growing cash dividends is one of the market's best strategies.
This idea was heavily "stress tested" in 2011. The broad market went through huge swings... and was crushed during the summer panic. Some of the market's riskier companies fell 25%-50% in just a few months. But most of our favorite dividend-payers – like Coke, Intel, and Wal-Mart – held up just fine. (Read about this phenomenon here.)
In the past few months, we've highlighted how more and more people are recognizing the power of basic dividend-payers. With interest rates low, the fashionable thing on Wall Street will be for fund managers to say, "I own blue-chip dividend-payers."
This "dividend momentum" has produced big surges in Wal-Mart, Intel, and Microsoft. And as you can see from today's chart, elite dividend-payer Coca-Cola is surging as well. Shares just registered a 52-week high. The rush for dividends continues...
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