Inflation concerns are legitimate, but I think the widespread\nconcern may be slightly overdone. For one, investors should be wary any time\nthere is such clear market consensus about something like inflation. At Zacks\nInvestment Management, we lean on our own proprietary research to make\ndecisions \u2013 not on what is being widely reported in financial media. <\/p>\n\n\n\n
Second, I think some key, under-appreciated forces at work\ncould neutralize inflation pressure in the years to come. I detail four of\nthese forces below. <\/p>\n\n\n\n
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What to Do When Inflation is Worrying You – Focus on Key Data and Fundamentals!<\/a><\/strong><\/p>\n\n\n\n This past month, we\u2019ve witnessed the acceleration of what\nmost investors fear \u2013 inflation. In a very volatile market, concerns of rising\ninflation will always be an unsettling topic when it comes to making financial\ndecisions. The pressures of the media may cause you to make these decisions\nimmediately, and often, without fully doing your research. In times like these,\nremember to not panic and don\u2019t time the market! Now is the time to focus on\nfundamentals, hard data, and quality that can positively impact your\ninvestments in the long term. <\/p>\n\n\n\n To help you do this, I am offering all readers our\njust-released Stock Market Outlook report. This report contains some of our key\nforecasts to consider such as:<\/p>\n\n\n\n If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! __________________________________________________________________________<\/p>\n\n\n\n About 10,000 baby boomers turn 65 every day. This means a\nsignificant portion of the workforce is marching towards retirement. The\npandemic has accelerated the trend as baby boomers have not returned to the workforce\nas the economy reopens at nearly the pace of younger workers.<\/p>\n\n\n\n On the other end of the spectrum, the Brookings Institution\nestimates there will be 300,000 fewer births in the U.S. in 2021 than there\nwould have been absent the pandemic and economic recession. Couple that data\npoint with a 2016 landmark study published by the Federal Reserve, which found\nthat sharp drops in fertility in the 1960s and 1970s were the biggest factor\nresponsible for falling growth rates and interest rates after 1980.<\/p>\n\n\n\n At the end of the day, economic output (GDP growth) is\ndriven by total workers in the economy multiplied by how productive each worker\nis. With demographic trends pointing to fewer total workers in coming years and\ndecades, I think there could be some secular deflationary forces at work.3<\/sup><\/p>\n\n\n\n Over the last year, companies across every sector of the\neconomy invested in productivity-enhancing technology. Business investment in\nconsumer equipment and software rose by 17% and 6% in Q4, respectively, even as\nGDP fell -2.4%. Companies also invested more in automation, videoconferencing\nsoftware, and enterprise cloud services. In my view, this type of investment\nwill continue scaling up in future years. <\/p>\n\n\n\n Investing in technology puts downward pressure on input\nprices and in many cases, increases productivity per worker \u2013 two deflationary\nforces.4<\/sup><\/p>\n\n\n\n The issue over the last 20+ years in the U.S. has been not\nenough inflation. In the chart below, the red line shows the target 2% rate of\ninflation, which readers can see has been met only about half the time. <\/p>\n\n\n\n That\u2019s why I think seeing inflation run above-target for a\nfew quarters could be a good outcome, and it should not necessarily sound alarm\nbells at first. Inflation can be pernicious if unchecked, but a healthy amount\nof inflation is also good for the economy. <\/p>\n\n\n\n If inflation becomes a concern down the road, the Federal\nReserve has tools to push back. Among the primary tools available to the Fed,\nthey could raise the interest rate paid to banks on excess reserves, reduce or\nend bond purchases, or raise the federal funds rate. One concern for many\ninvestors is that Fed action to tighten monetary policy and fight inflation\nautomatically means selloffs and\/or the end of the bull market. But bear\nmarkets usually start after the last Fed rate hike, not the first one. <\/p>\n\n\n\n Bottom Line for\nInvestors<\/strong><\/p>\n\n\n\n My point here is not to say that inflation will be\nunimportant or even modest in the quarters and years to come. But I do think\nthe narratives currently surrounding inflation are painting it as an inevitable\nkiller of economic growth and the bull market, which I think is overdone. There\nare economic forces at work that could neutralize inflation over time, and the\nFed has tools to keep it in check.<\/p>\n\n\n\n Don\u2019t let inflation cause you worry and act\nright away on your investment decisions. I recommend focusing on key\ndata points and economic indicators that could positively impact your\ninvestments in the future. Here at Zacks, we manage client\nportfolios based on investment goals, and we drive our decision-making process\nbased on research. <\/p>\n\n\n\n
IT\u2019S FREE. Download the Just-Released May 2021 Stock Market Outlook<\/a>2<\/a><\/sup><\/strong><\/p>\n\n\n\n![\"\"](\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/pic12-1024x395.png\")