Paul McCartney, Inflation, & Our Investments

Paul McCartney, Inflation, & Our Investments

Our family are huge Beatles fans, and we could not miss Paul McCartney's recent concert in Seattle. The show was amazing — as a friend said afterwards, it was a 3 hour sing-along with one of the greatest musicians of our lifetime.

McCartney jarred my financial brain back to the present when he opened with "Can't Buy Me Love" and then went immediately to his ode to the inflationary 70s, "Junior's Farm" — with lyrics about prices at the grocer's store being higher than the ceiling.

Inflation: The Specter from the Past

Inflation is at its highest level in 40 years — a problem that most investors alive today have never experienced in their investing lives. Paul McCartney was writing about inflation in the 1970s because it was a defining financial problem of that era. Today, it is becoming a defining financial problem of our era.

Inflation matters for investors for several reasons. It erodes the purchasing power of fixed income and cash. It often leads central banks to raise interest rates, which hurts bond prices and can slow economic growth. And it creates winners and losers across different sectors of the economy.

What Tends to Do Well During Inflation

• Real assets — real estate, commodities, and infrastructure often keep pace with or outperform inflation because their prices naturally rise with the general price level.
• Short-term bonds — unlike long-term bonds, short-term bonds mature quickly and can be reinvested at higher rates as rates rise.
• Value stocks and energy companies — companies with pricing power and those in the energy sector often do well when inflation is high.
• Treasury Inflation-Protected Securities (TIPS) — bonds explicitly designed to rise with inflation.

What Tends to Struggle During Inflation

• Long-term bonds — their fixed payments become worth less in real terms, and their prices fall as interest rates rise.
• High-growth technology stocks — their valuations are based on future earnings discounted at higher rates, making them less attractive as rates rise.
• Cash — money sitting in a low-interest savings account loses purchasing power every year inflation exceeds the interest rate.

Our Approach

We have been reviewing client portfolios to ensure they are well-positioned for an inflationary environment. This includes evaluating bond durations, reviewing sector exposures, and making sure clients have appropriate real asset exposure. We are also encouraging clients to review their income needs and avoid holding excess cash beyond what is needed for near-term expenses.

As always, we are here to help you navigate this environment. Please reach out anytime.

— Willy, William R. Gevers CPWA®