Portfolio Strategies for Inflation & Rising Rates

By Brent McQuiston CFP® on February 10, 2022

The headwinds are upon us to combat two forces that are intertwined together, inflation and rising interest rates.  Inflation has had a meaningful impact especially on the working class and low-income earners.  We are seeing price increases that we haven’t seen in decades.  The pace of inflation has grown faster than wages which means that each dollar doesn’t go as far.  The price of gasoline, housing, automobiles, and food are inescapable examples of items that impact us.  To fight the longer-term problem of inflation the Federal Reserve has signaled policy to begin hiking the Federal Funds rate, likely starting in March this year.

The Fed’s actions should help bring down inflation over time.  The key will be how long it will take and can they perform this task while not dramatically slowing economic growth.  Currently, the Fed Funds rate is at .25% which is an all-time low.  There is a lot of room for future increases in the coming months and years.   

In anticipation of the Fed’s future moves market interest rates for bonds have already begun to climb higher.  For example, the 10-Year Treasury Bond has quickly risen, closing in on a yield of 2%.  That is nearly a 4-fold increase in the 10-Year Treasury yield in less than 2 years. 

The inflation-induced environment has started to pull interest rates higher which have an impact on both the stock and bond markets. 

The Nasdaq Composite which has high exposure to technology companies has led to the recent weakness in the equity markets.  Higher interest rates tend to be a headwind for growth companies while value stocks tend to be less volatile.  As such it makes sense to analyze your exposure to growth vs. value stocks and make any rebalancing adjustments as needed.

Portfolio rebalancing forces profit-taking on positions that have performed well in recent years.  This helps keep risk in check.  We advocate having a balance between growth and value that meets your risk tolerance while being aware of the current headwinds.

On the bond side, we are in an environment that is difficult for traditional bond strategies.  As rates go higher bond prices tend to decline which could lead to low or even negative returns on traditional bonds.  Currently, we like to complement traditional bonds with strategies that are more resilient in a rising rate environment.  This includes shorter-term bonds, floating-rate bonds, and other non-traditional fixed-income investments. 

It is important to be diversified within and across various stock and bond strategies.  Our investment committee continuously monitors the ever-changing landscape, and we update our strategies accordingly.  If we can be of service to anyone in your circle of friends let us know. 

Should you have any specific questions on your portfolio please feel free to reach out to your financial advisor. 

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