Key Points
The Fed has taken steps to combat inflation.
You can take steps to benefit, such as by investing in exchange-traded funds (ETFs).
Commodities and short-term bonds should benefit.
People have strong and differing opinions about the current U.S. administration. But this article isn't a discussion about President Donald Trump's economic views or politics. Rather, this piece will focus on how the current policy is affecting the macroeconomic climate and how investors can manage those effects.
Ongoing issues such as the war in Iran, the military conflict in Ukraine, the use of tariffs to control trade, and shifts in spending priorities have all contributed to rising inflation that investors must factor into their portfolio choices.
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Here's a look at the economic data and how it might affect your portfolio. I'll also delve into how investors can position their holdings to benefit from the current climate.
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Economic headwinds and market impact
The U.S. Bureau of Labor Statistics reported the trailing 12-month Consumer Price Index rose 3.4% in August, with energy increasing 16.3%. That CPI is higher than the Federal Reserve would like, and the central bank responded by hiking short-term interest rates by a quarter of a percentage point at its latest meeting. The Federal Open Market Committee is likely to raise them again before the end of the year, based on projections they released.
Higher inflation and the Fed's response to it have been two factors helping drive U.S. Treasury yields higher across the maturity spectrum. Since the start of September, the two-year and 10-year Treasury yields rose from 4.39% and 4.79%, respectively, to 4.87% and 5.18% on Sept. 24.
Equity investors typically don't react well to high inflation and increasing interest rates. The S&P 500 index (SNPINDEX: ^GSPC) fell 0.45% in September. If inflation persists and the Fed continues to raise interest rates, expect stocks to continue reacting negatively.
Positioning your portfolio
It's not all gloom and doom, however. You can take steps to benefit from the current climate. This will also provide long-term diversification benefits. One way to invest is through exchange-traded funds (ETFs). ETFs specializing in commodities should do well as the underlying prices rise.
The abrdn Bloomberg All Commodity Strategy K-1 Free ETF (NYSEMKT: BCI) is a good option. It passively tracks the Bloomberg Commodity Index Total Return and has a relatively low expense ratio of 0.26%. The ETF holds commodities like gold, crude oil, natural gas, and soybeans.
Short-term bonds provide protection from inflation and rising interest rates. That's because their prices are less sensitive to interest rates than long-term bonds. Specifically, I like the low-cost Vanguard Short-Term Inflation Protection Securities ETF (NASDAQ: VTIP).
It has an ultra-low expense ratio of 0.03% and tracks the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index. TIPS are U.S. Treasury securities whose principal adjusts upward with the CPI, protecting an investor against inflation.
Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.