November 22, 2021 BARRON’S 9
STREETWISE
Katie Nixon of Northern Trust: “You’re probably
better positioned for inflation than you think you
are right nowowning the S&P 500.”
Time for Investors
To Talk Turkey
About Inflation
D
on’t get caught
flat-footed on
inflation this
Thanksgiving
when family and
friends gather to
argue politics over
dinner. Shop around beforehand for
data to fit your side.
“Survey Shows Thanksgiving Din-
ner Cost Up 14%,” reads the title of a
new report from the American Farm
Bureau, a lobbying group. Putting
aside the fine details of who holds
sway over prices, that’s not a good
look for the party in power—the
Democrats, sort of. On the other
hand, the Department of Agriculture
says that Thanksgiving staples prices
are, in fact, up 5%. That’s enough to
pinch the budget-constrained, but it’s
hardly hyper-yamflation.
Why the disconnect? It comes
down mostly to turkey and timing. The
USDA assumes a 12-pound bird,
priced at 88 cents a pound, based on
advertised prices during the week
ended on Nov. 12. The Farm Bureau
uses a 16-pounder, priced at $1.50 a
pound, based on numbers collected
from “volunteer shoppers” from Oct.
26 to Nov. 8. But in the body of the
report, it notes that turkey had tum-
bled to 88 cents a pound by publica-
tion date, as stores ran sales closer to
the holiday. That discrepancy notwith-
standing, I know which group I’d
rather eat with. Beyond turkey, the
USDA includes only potatoes, green
beans, and milk in its math, whereas
the Farm Bureau adds these plus stuff-
ing, rolls, pie, and whipped cream.
If pricing turkey can get murky,
think about how political passions
might skew the current debate over
broader inflation, and where it’s
headed, and what to do about it as
investors. And consider not over-
hedging.
Some assets that are overtly tied to
consumer prices look expensive, says
Katie Nixon, chief investment officer
of Northern Trust’s wealth manage-
ment arm. “I do think investors ulti-
mately who are overpositioned for
inflation will be disappointed,” she
says. “You’re probably better posi-
tioned for inflation than you think you
are right now owning the S&P 500.”
The latest reading on the consumer
price index shows a 6.2% jump from
last year, the fastest in three decades.
Some of that, like a 9.8% increase in
new-vehicle prices, is probably related
to reopening demand and supply-
chain snarls, but there is rising con-
cern that part of the faster inflation
rate will stick.
For one guess on how much of
the current inflation rate is tied to
demand, rather than extraordinary
factors, look at the median consumer
price index, which tracks the middle
good ranked by price increases. It’s up
3.1% year over year. Or look at some-
thing called the 16% trimmed-mean
CPI, which is like the regular CPI, but
with the highest and lowest eight per-
centage points of price changes lopped
off.It’sup4.1%.
Of course, that is past inflation. To
know what future inflation will look
like, you would have to predict shop-
per behavior, which is difficult, even
for shoppers. A survey of U.S. con-
sumer confidence recently fell to its
lowest level in a decade, but retail
sales in October rose by a seasonally
adjusted 1.7%. If you somehow could
accurately predict inflation, the next
thing to guess would be how the Fed-
eral Reserve would respond, and how
investment markets would react,
which will depend on whether infla-
tion is seen as healthy or overheated.
Supposing you’ve got a handle on
all of that, and feel prices will run
hot, the next question is: What to
buy? Treasury inflation-protected
securities, or TIPS, are overtly linked
to the CPI, and so provide slam-dunk
inflation protection, except for two
things. To buy in for five years at the
moment, you have to agree ahead of
time to lose 1.9% a year after your
inflation adjustment. Also—and this
might be nitpicking—the CPI isn’t the
same as your personal inflation rate.
It’s the rate for a nonexistent con-
sumer whose buying precisely
matches the index weightings. A
bachelor retiree, for example, might
fall short of spending 1.092% on
“women’s and girls apparel.” Higher
outlays for tomatoes than lettuce?
Sounds un-American. More on booze
than all other beverages combined? If
you insist.
Gold is an inflation hedge, but only
reputationally, not statistically. It lost
money during bouts of elevated infla-
tion from 1980 to 1984, and again
from 1988 to 1991.
Stocks are just the thing, regardless
of whether inflation roars or whim-
pers. The S&P 500 returned double-
digit yearly percentages over the 15
years ended in 1988, when average
inflation topped 6%; and over the next
15 years, when inflation was just un-
der 3%; and the 15 years after that,
when it was closer to 2%.
Stockpickers can get fancier than
the index. UBS recently recommended
companies that it views as having high
pricing power. Examples includeNike
(ticker: NKE),Coca-Cola(KO), gener-
ator makerGenerac Holdings
(GNRC), and real estate investment
trustExtra Space Storage(EXR).
Goldman Sachs says investors should
avoid stocks with high labor costs as
a percentage of revenue, combined
with low median pay, on the assump-
tion that wage inflation will sting. It
tracks an index of them, including
Bright Horizons Family Solutions
(BFAM),Las Vegas Sands(LVS), and
AutoZone(AZO).
Indexers, meanwhile, can make
sure they have money spread over-
seas. Markets like Europe and Japan
are cheaper than the U.S., and have
more cyclical exposure, which could
come in handy if inflation remains
elevated.
For bonds, there are few good an-
swers, but no shortage of iffy ones.
Some strategists favor shifting money
to junk bonds. An index of them re-
cently yielded 4.4%, or nearly triple
the 10-year Treasury yield. And if
inflation stems from a strong econ-
omy, junk issuers could be in line for
ratings upgrades.
But Northern Trust’s Nixon says
the purpose of quality bonds is to
provide diversification, not plump
returns, and junk is no substitute:
“When you have a correction, you’re
going to be glad you have high-quality,
short-duration fixed income.”B
email: [email protected]
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