According to Mohamed El-Erian, a ‘trifecta’ of threats will befall the United States economy in 2022 – here’s how to safeguard your portfolio.
The January effect, which refers to the tendency for stock prices to climb at the start of the year, is in full swing again, as both the Dow Jones Industrial Average and the S& P 500 set fresh intraday highs on Tuesday.
However, according to Mohamed El-Erian, principal of Queens College, Cambridge University, and chief economic advisor at Allianz SE, the danger is just around the corner.
In a recent interview with Bloomberg, the economist identifies a “trifecta” of threats that the United States economy may face in the years ahead.
“Who would have predicted that you’d have inflation at 6.8 percent, that the 10-year Treasury would be around 150, and that the S& P 500 would have 70 record highs?” he wonders.
These three risk characteristics have important implications for investors, and there are several ways to protect yourself against them – including one exotic asset you may not have considered.
Our purchasing power is eroded by inflation. You won’t be able to buy the same number of goods and services if you’re carrying cash.
As El-Erian points out, the consumer price index increased 6.8% year over year in November, the highest increase since 1982.
You can try to defend yourself in a variety of ways.
In an inflationary environment, some stock market sectors perform well. Energy companies, for example, have made a significant comeback: Chevron has up 41% in the last year, ExxonMobil has risen 54%, and ConocoPhillips has risen a whopping 83 percent.
Others favour conventional inflation hedges such as gold and silver, which cannot be produced out of thin air like fiat money.
Meanwhile, an increasing number of people are referring to Bitcoin as the “new gold.” Investors can either acquire bitcoins directly or gain exposure to the cryptocurrency industry through companies like Coinbase Global, MicroStrategy, and Tesla.
Rising interest rates
“A system that has been used to low-interest rates for more than a decade and a lot of money would quickly be unable to handle higher rates,” he wrote in a Financial Times column this week.
It was at the end of December that El-Erian said that the 10-year U.S. Treasury note had a 1.50 percent interest rate. At the start of this week, the yield had already gone up to 1.73 percent.
Many people in the market don’t like when interest rates go up, but some financial companies, like banks, look forward to them. banks make money by lending money at a higher rate than they borrow at. They keep the difference. Banks make more money when interest rates rise, so the spread they make grows bigger.
It’s been a good year for Bank of America, JPMorgan Chase, Goldman Sachs, and Morgan Stanley. All of them have raised their dividends to shareholders.
A portfolio of blue-chip stocks that pay you regular dividends is always a good idea, even if you’re not sure which to pick. You can do this with some “spare change,” and it doesn’t even have to be a lot.
Stocks at record highs
Finally, El-Erian is worried that 70 companies in the S&P 500 are trading at all-time highs, which means the market is too hot.
It’s getting more and more difficult to find stocks to “buy low and sell high” when the index itself is rising to new highs.
Still, some fast-growing companies have recently had their share prices slashed so that they are more affordable.
When PayPal Holdings did business in Q3 of 2021, for example, it made more money than it did last year and processed more payments than it did last year. However, its stock has lost 34% in the last six months.
Check out Zoom Video Communications, which was once one of the hottest pandemic plays. Revenue for the company jumped 35% from last year to $1.05 billion in its most recent fiscal quarter. But the stock has lost 55% in the last six months.
There are a lot of high-priced stocks today, but you don’t have to spend a lot of money on a whole share. Some investing apps let you buy small parts of stocks with as much money as you want to spend.
A finer way to hedge?
Stocks are, at the end of the day, quite volatile. Stocks that have reached new highs may continue to rise out of reach. Similarly, not all beaten-down equities will recover.
Consider some underappreciated real assets, such as fine art, if you wish to invest in something that has a minimal association with the S&P 500’s ups and downs.
According to the Citi Global Art Market chart, contemporary art has outpaced the S& P 500 by a whopping 174 percent over the last 25 years.
Because it’s a physical asset with little correlation to the stock market, it’s becoming a popular method to diversify. Citi discovered a 0.12 association between modern art and the S& P 500 on a scale of -1 to +1, with 0 reflecting no link at all.
Investing in art like Banksy and Andy Warhol was once only available to the ultra-wealthy. But, like Jeff Bezos and Bill Gates, you can now invest in great artworks through a new investing site.