Nothing gets people’s attention faster than paying higher prices for housing, gas and groceries. That’s what makes it such a tempting news story to keep reporting on. It also makes it almost impossible for politicians and policy makers to ignore.
Until the inflation rate comes down, to at least 4% (it’s currently 6.8%), I don’t see most investment commentators talking about much else.
It’s not that inflation itself is all that dangerous to long-term investors; it’s the accompanying response of central banks around the world that is the catalyst for concern. There’s a reason why “Don’t fight the Fed” has become a mantra for so many successful investors—to some degree, interest rates determine the value of all asset classes.
Higher interest rates ultimately mean less borrowing and less spending. This often results in lower earnings per share and, consequently, reduces the value of most companies (whether publicly traded or privately owned).
For many years, when stock-market advocates were presented with evidence that company valuations were getting overstretched, they liked to say, TINA, which stands for “There is no alternative.” If you didn’t want to throw your money into pixie-dust-like assets, such as cryptocurrency or NFTs, then one of the few alternatives to stocks was 1% to 2% fixed-income returns. Most stocks looked pretty good in that environment.
However, when you can go online and grab a 5% GIC (guaranteed investment certificate), suddenly there is most definitely an alternative! When the mental stress of a bad year in the stock market comes at the same time as a very low-risk alternative emerges, that’s a recipe for the mood to sour on equities in a hurry.
Moving forward, I’d argue real estate returns may fall into the category of TIASA: “There is a safer alternative.” Why take the risk in buying a rental property when mortgage costs are dramatically rising and housing prices are still elevated from where they were pre-pandemic? That 5% GIC investment option is just sitting there. That’s 5% without any landlord headaches, a simple five-minute time commitment, and no risk of a market crash to keep you awake at night. Canadian real estate investment trusts (REITs) are down nearly 26% this year. And that risk-free rate no doubt has something to do with that.
All this is to say: The effects of inflation are keenly felt by both consumers and investors. Those will feel all the more pertinent in 2023 due to their absence for the past two decades. I’ve written about Canadian investments for inflation hedging at MillionDollarJourney.com.