See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Jubak's Journal Recent articles: • Why metals stocks haven't peaked, 4/18/2006 • Oil patch is drowning in cash, 4/14/2006 • 5 stocks for the coming retirement boom, 4/12/2006 More... | Jubak's Journal 5 stocks ready for inflation's return The Fed hinted that its interest-rate hikes are nearing an end, and the market soared. But the rally doesn't mean inflation is a thing of the past. By Jim Jubak Inflation expectations drive the financial markets. Or, more exactly, reversals of inflation expectations drive the financial markets. That's exactly what happened Tuesday, when the release of minutes from the Federal Reserve's March meeting convinced stock and bond investors that the Federal Reserve was less rather than more worried about inflation. Coming after a report that showed the core Producer Price Index, the Fed's favorite measure of inflation, up less than expected, the Fed minutes powered a rally that finished with the Dow Jones Industrial Average
Inflation exasperation But stocks wouldn't have moved nearly this much if the news out of the oil, gold, and other commodity markets hadn't raised inflation fears so high in the days leading up to the rally. Oil broke above $70 a barrel on Monday, and gold, the traditional inflation hedge, soared $18 an ounce. It sure looked like a double-barreled inflation blast: Oil prices would produce the inflation and investor fears of inflation would drive up the price of inflation havens. On Apr. 18, investors who had swung to an extreme of worry about inflation rebounded with relief. Related news and commentary on MSN Money
Don't think this rally, however, signals an end to inflation worries. The data are just too ambivalent for that. For example, take a look at the Federal Reserve's favorite inflation measure, the core Producer Price Index. In March, the numbers reported on Apr. 18 show, core inflation was running at an annual rate of just 1.7%. That's well within the Fed's no worry zone. And a huge decline from July 2005, when core inflation hit an annualized 2.8%, a ten-year high. So everything is hunky-dory on the inflation front, right? Wrong. Remember what the core inflation numbers leave out: energy costs. And that's exactly where the big price increases are coming from. According to the Producer Price Index, gasoline prices rose 9% in March -- even though those prices don't get factored into the core PPI -- and now stand 22% higher than a year ago. From one worry to another I'm afraid that investors are stuck with data that will support either position on inflation. Look at the core: no inflation. Look at energy prices: inflation. The likelihood is that expectations about future inflation will continue to swing from one extreme to another, driven by over-interpretation of genuinely ambiguous or indeed meaningless short-term data. And if circumstances seem to build on each other, then expectations are likely to move to an extreme. Such was the case in the days before the Apr. 18 rebound: Worries about a confrontation with Iran were followed by worries that a civil war in Nigeria would cut oil supplies, and those were followed by worries that Chad would cut its oil exports. Such thinking sets up the possibility of a big bounce in the other direction. I don't think stocks and bonds will stop swinging like a pendulum as investors worry about the Fed's next move until the Fed announces an end to its interest rate increases. That, of course, will just set the markets swinging between a new set of expectations. Investors will vacillate between the idea that the Fed got it just right and fears that the U.S. central bank had overshot its goals and sent the economy into a slowdown. That debate, in turn, won't be resolved until a slowdown actually shows up. (And maybe not even then, as economic measures are notorious for recognizing a recession only after the recession is over.) My advice? Enjoy this "No inflation worry" rally while it lasts. The good, old-fashioned growth stocks in your portfolio will flourish in such a rally, like May flowers after April's showers. And get ready for the next swing of the pendulum in the other direction. If you've already got your portfolio diversified with traditional inflation hedges, relax and do nothing. If you've been slow off the mark and haven't yet got enough inflation hedges in your portfolio, this rally might well give you a chance to add stocks to your holdings that will profit from a return of inflation expectations. Here are three inflation stocks: Grant Prideco Portfolio Recovery Associates Newmont Mining Of course, maybe you've already got your portfolio stocked up with inflation hedges and need a little more on the growth side of the ledger. Here are two growth stocks for those times when the market rallies on the expectation that inflation is under control and stocks and bonds have little to fear from higher interest rates. DaVita Central European Distribution Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Grant Prideco. He doesn't own short positions in any stock mentioned in this column. | ||||||||||||||||||||||||||||
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