Recently there has been a good deal of attention given to inflation, and for a good reason. Inflation is now impacting the average U.S. consumer in ways not seen since the 1980s, which appears less transitory than some economists had predicted in the aftermath of the pandemic. In the most simple terms, inflation is a function of too much money chasing a limited supply of goods and services. Over the previous three decades, inflation has been kept in check by technology and labor productivity gains that have increased supply to satisfy the growing demand for goods and services. Since the Covid-19 pandemic, the production of goods and services has not matched the tremendous increase in the money supply and the consumers' appetite to consume. As a result, consuming more than we produce has created rising prices for the foreseeable future.
Inflation is especially dangerous to retirement portfolios as rising prices erode the future purchasing power of our savings. While interest rates have increased over the past year, the actual inflation rate has far exceeded such increases. In today's interest rate environment, portfolios that hold cash or government bonds to preserve capital and reduce risk are simply not keeping up with inflation and will be able to buy fewer goods and services in the future. At Hodges, we believe the best way for investors to protect themselves against inflation is to own stocks of companies that own productive assets. Such assets include property, plants, and equipment that increase in value during times of inflation and increase the stock's value. As we have mentioned in the past, the Hodges investment team spends little time predicting interest rates, foreign currency fluctuations, or future commodity prices. However, we pay close attention to stock prices and, more importantly, the pricing power our portfolio companies exhibit within the goods and services they provide and consume. Companies that can pass on higher prices tend to have high competitive barriers or unique products that can not be easily substituted for other products. If a company can sustain demand while raising prices to offset higher costs, cash flow and earnings should rise faster than inflation and return greater value for its shareholders.
Important considerations to strategically positioning portfolios in an inflationary environment:
The above discussion is based on the opinions of Eric Marshall and is subject to change. It is not intended to be a forecast of future events a guarantee of future results and should not be considered a recommendation to buy or sell any security. Hodges Capital Management does not guarantee the accuracy or completeness of this commentary, nor does Hodges Capital Management assume any liability for any loss that may result from the reliance by any person upon any information or opinions herein.
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This discussion is not intended to be a forecast of future events and should not be considered a recommendation to buy or sell any security. Past performance is not indicative of future results. Investing involves risk. Principal loss is possible. Investing in smaller companies involves additional risks such as limited liquidity and greater volatility. No current or prospective client should assume that information referenced in this communication is a recommendation to buy or sell any security or is a substitute for personalized investment advice from your individual advisor. HCM does not provide tax or legal advice. Consult your tax or legal advisor for any related questions.
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