Be Immune to the Herd | Investors Edge

By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review: Inflation Accelerates Again

Talking about inflationary pressures has become fairly routine at this point, but the October Consumer Price Index, or the CPI, for short, ran ahead of already lofty expectations.

The headline number clocked in at an annual rate in excess of 6%, a new high for this cycle and the highest reading in more than 30 years.

The hotter-than-expected inflation numbers reported last week caused some volatility in the stock market, but by the end of the week the S&P 500 index recovered most of what had been lost and was trading back near all-time highs.

The resilience of the equity market has surprised even the most optimistic bulls, and goes to show that stocks love to climb a wall of worry. The combination of unprecedented amounts of liquidity stemming from ultra-generous monetary and fiscal policy during the past 18 months, along with few attractive investment alternatives to the stock market given still very low interest rates, has created an environment in which any pullbacks are short and swift.

Tread carefully, however. That wall of worry is beginning to turn into a wave of euphoria, which is typically a sign that rougher waters could be on the horizon.

Featured Insight: Be Immune to the Herd

Herd behavior is one of the most timeless characteristics of the investing landscape – tulip bulbs in the 1600s, industrial companies in the 1920s, stocks in the 1990s, and pick your poison in 2021 – there are quite a few to choose from.

Cheap money usually fuels the fire, and investors jump on board for little reason other than the price keeps going up and they see their friends getting rich and they don’t want to miss out on the party.

I always caution investors to beware the most popular and crowded investments because they tend to be the most overpriced and the most vulnerable in the event that market conditions change.

As inflation pressures continue to mount, liquidity conditions are likely to tighten and that will ultimately cause the herd to feel the most pain.

Looking Ahead: Powell or Brainard?

The Federal Reserve Bank has been key in keeping the markets afloat over the past couple of years – really, since the financial crisis of 2008.

Their ultra-low interest rate policy – the Fed Funds rates has been at zero for the better part of the past 13 years – as well as their bond buying programs, which effectively create money out of thin air – underpin the ability of corporations to borrow money to buy back stock, which increases earnings per share and helps drive the stock market higher.

This more activist Fed, if you will, has spanned at least three chairs – Ben Bernanke, Janet Yellen, and current Fed head Jerome Powell.

President Biden is currently deciding whether to replace Powell with Fed Governor Lael Brainard. In fact, it is possible his decision will have been announced by the time this video airs.

Should Biden choose Brainard, she is likely to be even more liberal with her use of monetary policy – something that’s difficult to believe given what we’ve experienced in the past 18 months – on balance that is likely to put further downward pressure on the U.S. dollar and further upward pressure on inflation.

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