Stocks for 'Flationary Times?

Posted by: Lauren Young on April 28, 2009

Which ‘flation camp are you in?

Most of the 50 advisers and analysts I interviewed for a story about ‘flation in the most recent issue of BusinessWeek think the U.S. economy is headed on an inflationary path, but not everyone agrees.

“Picking which ‘flation we may or may not be heading toward can be like predicting the severity of the coming hurricane season,” says Eric Zimmerman, a partner at Chatham McKinley Partners in Atlanta and Savannah, which works with private family partnerships and foundations. “The so-called gurus really don’t know if a storm is coming. Most are assuming one is looming. We think it is in question if one does make land at all, let alone what category it will be or if it will be a hurricane by the time it gets here.”

In other words, Zimmerman and his partner Rick Muller aren’t worried about inflation. So how are they positioning client portfolios now? The duo believe stocks are especially appealing. While the most extreme cases of inflation in the 1970s as well as deflation in the early 1930s grab headlines, “the hard truth is those periods are, in fact, the outliers,” Muller says.

Economies and markets typically “muddle through” averaging things out during the three to four years following a major ‘flationary bout, Muller says. “We think the odds are in favor of a ‘muddle through’ period, in spite of the current extraordinary circumstances,” he notes.

Inflation has averaged 3% during the past 80 years, these advisers argue. By contrast, dividend growth from stocks has averaged 6%. Although dividends for the entire S&P 500 will be down a good bit this year, the yield on the S&P is currently 2.6% based on 2009 estimated dividends.

Here is how Zimmerman and Muller compare stocks to other ‘flation-oriented investments:

Treasury Inflation-Protected Securities (TIPS)
“The 9-year TIPS real yield is roughly 1.5%. Stocks pay a higher yield and dividends on stocks have increased at 6% per year vs. the rate of the CPI at 3%. Here TIPS lose to stocks.”

Gold
“Seems like a logical safe haven but over the last 10 years gold has already tripled, and today lots of bad outcomes are already discounted so again stocks represent a more attractive value today.”

10-year Treasury
“It is only slightly more than stock yield but it has no growth to its coupon. (With historic outperformance to stocks), here again lots of bad things are already discounted in and again stocks represent a more attractive value from here.”

What’s your take? Do you think fears of fears of surging inflation are overblown?

Reader Comments

Daniel Thompson

April 30, 2009 2:16 AM

gold would have been nice to buy 10 years ago. Thanks for the article. I learnt some thing i didn't know :)

youyou

May 5, 2009 9:52 PM

The 9-year TIPS real yield is roughly 1.5%. Stocks pay a higher yield and dividends on stocks have increased at 6% per year vs. the rate of the CPI at 3%. Here TIPS lose to stocks.”
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pheobe

May 5, 2009 9:53 PM

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saisai

May 5, 2009 9:56 PM

It is only slightly more than stock yield but it has no growth to its coupon. (With historic outperformance to stocks), here again lots of bad things are already discounted in and again stocks represent a more attractive value from here.”
http://www.customs-data.net.cn/American-Customs-Data/

Gary

May 10, 2009 9:19 AM

Many dismiss that we will have inflation in the future. How can they doubt it? All of my costs keep going up despite supposedly deflationary times. This past week should have been a wakeup call for the markets and the government. The 30 year bond auction did not go well and interest rates spiked. The next day, the value of the US Dollar plummeted. If you track the US stock market in terms of the Euro or gold, you will see it is not advancing so well. All assets are inflating now as the dollar devalues. I write daily about the 10 year and such issues at http://www.assetdesigncenter.com

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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