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Inflation's Not the Enemy: Focus on Long-Term Objectives, Instead

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A picture speaks a thousand words they say and this inflation chart based on BLS data certainly fits the bill.

But all inflation isn’t bad. A certain amount supports continued growth. It’s only when inflation is out of control, or when there’s a bubble forming somewhere, that there is some real concern.

That doesn’t seem to be our condition today. Most of the inflation is because of a negative base effect, made worse by supply chain issues.

And while it is a fact that any sustained price inflation can have a negative impact on portfolio returns, supply chain issues don’t continue indefinitely. Also, we will soon be seeing tougher comps because the economy rebounded very strongly in Q3 2020 and remained strong thereafter. So the problem of elevated inflation may be short-lived.

Additionally, now that OPEC+ has agreed to increase production, with oil prices retreating more than $4 a barrel Monday, we can hope for cost reduction across sectors, with a corresponding reduction in inflation rates.

So maybe we shouldn’t be overly concerned about the rising bond yields and focus on our long-term investment objectives instead. And if that includes bonds or other fixed income investments, know that the problem will soon sort itself out. Or, if you’ve got the jitters, switch to the inflation protected treasuries (TIPS) instead.

But if you are not retiring anytime soon and are in the market for stronger growth and therefore, greater risk, the stock market is still a great place to be in. And that doesn’t just mean for the so-called inflation-protected segments like commodities, real estate, technology and so forth. In fact, since traditional inflation hedges are getting more expensive by the day, it may make much more sense to play more lasting trends.

One such area would be retail. With the great re-opening (that is more likely than not to stay), pent-up demand for moving outdoors, auto dealers, apparel and shoes are looking really hot. And if you consider the construction bottlenecks and affordability issues, there’s also strong demand or home interiors/improvement. So these areas look pretty hot.

Construction itself is hot hot hot (particularly residential, although commercial is also picking up and government will follow suit once Biden’s proposal gets into action). And that’s despite labor and lot issues that are leading to relatively lower inventories. Of course, it’s happening because we haven’t seen this level of demand in decades.

Affordability is the only factor pulling back sales, although the government is surely doing its bit with all the free money. But while there are so many ways to play this market, what looks best right now are the wood suppliers and home builders.

You may also want to consider the materials sector where iron and steel are in strong demand given the early stage of the business cycle, egged on by the race for manufacturing supremacy. But chemicals are also looking good with the general uptick in the economy, in manufacturing and a variety of other uses.

Another sector I’m liking more and more is transportation (particularly shipping, but also trucks). High demand a rebounding economy are in general positive for transporters because they can charge higher rates. But capacity constraints are adding to these gains at the moment. 

Consumer discretionary (particularly shoes & apparel, leisure and recreation) also look good, for obvious reasons.

And finally, we come to tech, which is a mixed bag given the sheer diversity. But this is as good a time as any to remind investors that tech exposure is a good way of buying future growth, as it’s kind of like oil in the way that it influences all the other sectors.

Given all of the above, here are a few stocks worth buying into today: AutoNation, Inc. (AN - Free Report) , Penske Automotive Group, Inc. (PAG - Free Report) , LouisianaPacific Corp. (LPX - Free Report) , Olin Corp. (OLN - Free Report) , Vista Outdoor Inc. (VSTO - Free Report) , ArcBest Corp. (ARCB - Free Report) and Danaos Corp. (DAC - Free Report) .