Runaway inflation and rising rates

The key issue these days is runaway inflation and high and rising interest rates in an attempt to bring it back under control.

How to deal with runaway inflation/interest rates

In 2022, inflation has soared to heights not seen since the 1980s. In addition, inflation has hit many countries around the world. That’s largely because global supply chains are less resilient than formerly thought. Gummed-up supply chains have upset the balance between supply and demand. A drop in supply and strong demand drove up prices of goods and services.

In order to reduce inflation, most central banks around the world are raising their interest rates quickly. The idea is to slow demand until supply catches up.

Interest-sensitive sectors are hit

In Canada, house prices have fallen since peaking in February. Lower prices will appeal to some would-be home buyers. The trouble is, higher interest rates make it harder for buyers to qualify for a mortgage. Even if they can qualify for a mortgage, they would face risks. How high will interest rates go? Can they make their payments if interest rates rise substantially?

We also expect higher interest rates to restrain vehicle sales in the short term. Even so, the U.S. is making major investments to produce semiconductor chips. These are essential for modern vehicles.

Auto’s long-term outlook is favorable

North America is also investing in building electric vehicles. With financial inducements, mandatory sales targets and growing production runs, these vehicles should become more affordable. Then, too, vehicles eventually wear out and get replaced. The long-term outlook is favourable. Of the 10 auto-parts stocks that we regularly review, seven remain buys. All seven are expected to earn more next year.

Higher interest rates also make investment more costly. In fact, some projects are no longer economically feasible. If the economy enters a recession, company earnings are likely to decline. In the long run, it’s the direction and magnitude of earnings that set stock prices.

Buy producers of necessity

One way to protect your money is to invest in sectors that are less affected by interest rates. These include utilities that provide necessities that consumers can’t do without.

Electricity utilities, telecommunications, banks, insurers and groceries come to mind. It also includes providers of consumer staples such as our three Key Stock supermarket chains.

Buy higher quality stocks

It also pays to go up the investment quality scale. Focus on stocks that we rate ‘Very Conservative’ or ‘Conservative’. They can hire the best and the brightest employees. Governments can bail them out, as happened with non-Key stock General Motors and some American banks. In short, go for high-quality suppliers of necessities.

Another way to protect your money is to buy interest-producing investments. Interest rates are much higher these days and are likely to go higher still. Buy them in your Registered Retirement Savings Plan, Registered Retirement Income Fund or Tax-Free Savings account. This will shelter your interest income from income taxes.

We explain the nitty-gritty details on how to reinvest gains and how to shelter them from taxes in our weekly newsletter The Investment Reporter.

September is the only losing month

September is the only month that American stocks fall, on average. The biggest crashes have occurred in October. On the positive side, American stocks usually climb after the mid-term elections. That could become an opportunity for you to scoop up lower-cost stocks ahead of a stock market recovery.

This is an edited version of an article that was originally published for subscribers in the September 30, 2022 issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846