As the stock market continues its remarkable recovery from the 2008 financial downturn with new highs and record performance, many investment professionals are waiting for a very big shoe to drop. That shoe is the growing concern over the potential for inflation to return as a major market factor. Every announcement by the Federal Reserve is followed very closely by the investment community, in part because of this issue of inflation. There is a widely held belief that once the present controls and quantitative easing actions cease, inflation will become a growing problem. Two underlying dynamics that make many feel inflation – even a high rate of inflation – is inevitable are the tremendous level of governmental debt and continued deficit spending. While there are many different views concerning the impact of a return of significant inflation, it is undisputed that it will cause major changes in the investment community. This influence will be compounded by what is seen as an equally inevitable increase in interest rates.
The financial markets are quite significant to the issues of inflation and interest rates because of their impact on investment portfolios. The direct link between the pricing of securities and bonds relative to interest rates and inflation is well known. If inflation returns as a market factor, many billions of dollars in investment portfolios will be reallocated to deal with that reality. For nearly a decade historically low levels of interest rates have driven investment strategies that will be significantly modified when higher inflation and interest rates drive the markets.
Investment professionals such as Scott Reiman find it necessary to respond more than today’s investment environment. To survive the cycles that are a natural part of the financial markets, they must anticipate changes so their portfolios don’t end up on the wrong side of a shift in the market. The process of anticipation is both an art and a science. Investment professionals wade through mountains of data, analysis, and information to assess the factual basis of current trends and market activity. In the final analysis, however, these professionals must use their judgment and instincts to decide how to react to market conditions.
The goal of every investment professional is, of course, to buy low and sell high. Financial managers who are successful at consistently achieving this goal are the ones that attract a large number of investors and are well-rewarded professionally and financially.