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Over the past few years, the United States has been on an inflationary roller coaster. In June 2022, the inflation rate peaked at her 9.1%. This is his highest level since 1981. Inflation rates have fallen significantly since then. In December 2023, it was 3.35%. The big question here is: Will inflation rise or fall in 2024?
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Inflation will likely subside this year, but only time will tell if that is for sure. Assuming the worst-case scenario (increasing inflation), what does that mean for your investments and the stock market as a whole?
GOBankingRates spoke to financial experts about what will happen to your investments if inflation rises in 2024.
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Volatility and risk may increase
AJ Giannone, CFA and chief investment officer at Ario, believes the Fed will keep rates well within the restrictive range and cutting rates is off the table.
“Additionally, the Fed is likely to lower its expectations for when it plans to taper its balance sheet reduction program, known as quantitative tightening,” Giannone said. “This will force the market to reprice across risk assets, which will almost certainly result in increased volatility and swings in investor sentiment, exacerbating the underlying risks. right.”
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The value of the bond may decline
As inflation rises, interest rates typically move in the same direction. This could reduce the value of existing bonds.
“This is because new bonds are likely to have higher yields, making existing bonds with lower interest rates less attractive,” Giannone said. “For client portfolios, this means the value of fixed income investments may decline. TIPS (Treasury Inflation-Protected Securities) currently offer attractive real yields and would benefit from rising inflation expectations. We encourage our customers to hedge with
Money market funds can outperform
If you’re looking for an asset known for its stability during turbulent times, consider money market funds.
“Given the extremely low risk of a loss of principal and the increased income generation on the back of rising interest rates, money market funds are not subject to inflation,” said Daniel Dusina, CFA chief investment officer at Blue Chip Partners. “There is a possibility that it will outperform in the coming period.” “Money market funds’ distribution rates will fluctuate. And as the Fed raises interest rates to combat inflation, the income generated will increase.”
Precious metals may underperform
“We expect precious metals like gold and silver to underperform money market funds,” Dusina said. “Precious metals provide stability, but they are not income-producing assets. Money market funds provide both stability and income, the latter increasing with interest rates.”
Stock market trends will vary
The stock market can be a little more difficult to navigate during periods of high inflation, but investors should look to companies that are well-established as making huge profits.
“In an inflationary environment, we generally expect companies with high profitability and strong pricing power to outperform the broader domestic equity market,” Dusina said. “Investors will look to these stocks if they provide better protection from inflationary pressures.”
But it’s only seen from one angle.
“On the other hand, companies that are unprofitable and have large amounts of capital, [stock] In my view, value given potential future profitability is expected to underperform,” Dusina said. “Increasing borrowing costs could hinder unprofitable companies’ ability to service their debt and grow.”
Consider real estate (such as real estate) that can hedge against inflation.
Investors should strongly consider “real” assets such as real estate and commodities, as they can be a powerful hedge against inflation.
“They have the potential to increase in value or provide returns commensurate with inflation,” Giannone said. “Adding or increasing your allocation to these assets can be beneficial to diversify your portfolio and protect against inflation.”
After all, rising inflation can wreak havoc on the economy, which can impact investors. However, there are ways to protect yourself.
“The best way to protect yourself is to proactively modify your portfolio to include prudent allocations to inflation-controlling assets such as floating-rate bank loans, real estate, and growth-oriented stocks,” said Thomas J. Block of the Panel of Experts. “We need to build on that,” he said. Member of Credero. “These assets are more likely to generate higher income or experience significant valuation appreciation in the face of rising prices.”
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This article originally appeared on GOBankingRates.com: What will happen to your investments if inflation rises in 2024?
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