The May Consumer Price Index showed inflation remained unchanged month over month. Federated Hermes Senior Portfolio Manager RJ Gallo joins Wealth! to give insight into May’s CPI report and what it means for investors’ portfolios.
“Here in the United States, I’d be buying some fixed-income stocks…They’ve done very, very well. The total returns on stocks vastly outpaced the total returns on cash or bonds over the last 12 and 24 months, and that’s wonderful, especially for individual investors or institutional investors with a long horizon,” Gallo tells Yahoo Finance.
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This post was written by Nicholas Jacobino
Video Transcript
I just want to talk about one more factor within this report.
And then we’ll get into some investment strategy here for viewers as well here, the index for owners equivalent rent uh as we saw Shelter index increase 4/10 of a percent.
May the largest factor in the monthly increase in the index for all items, less food and energy.
You, you take that into consideration, the fed has been laser focused on this owner’s equivalent rent piece.
So where does today’s data?
Do you think add fuel to their conversation?
Uh It is not cooperating enough.
Uh The the owner’s equivalent rent component is still too high.
Uh It raised it increased this month from prior month at a 0.4% pace.
Uh That’s still too hot.
I recall that this has a very heavy weighting in the CP I Shelter has like a a weighting of almost a third I believe in the CP I.
Uh some are critical of the way that inflation of of shelter costs is actually calculated.
It’s based upon looking at what the value of one’s home would rent for weren’t available in the rental market.
And so in order to, to impute that value, they look at uh the value of apartments and homes that are being rented uh in real time as opposed to those that are owned.
Uh And those rental markets, the data from places like Zillow and others suggest that uh there has been some meaningful disinflation in the rental market yet, the owner’s equivalent rent series uh isn’t yet dis inflating enough.
Um Given the quirks in measuring what I could rent my home for.
Uh you know, sometimes it’s helpful to look at what inflation is doing X shelter.
Uh So for example, if you look at services excluding shelter, uh you know that number is is much more, much more um reasonable.
So for example, all items less uh food, shelter and energy that increased 0.0 in the most recent reading.
So when you step away from that shelter component, you see the data is encouraging and in the direction that I was saying where eventually we should be getting a fed comfort level with easing and the shelter component is not helping just yet, but, but over time it should roll in, it should get there and proving that it is one of the stickiest elements of inflation.
So with that in mind, let’s put some strategy on top of it.
How can people who are trying to hedge against where the stickier areas of inflation continue to show up in reports like this uh are enacting investment strategy.
Uh And what is the kind of top uh play that they could perhaps bring out of that, that inflationary hedge playbook if you will?
Well, I wouldn’t call it a direct uh inflation hedge.
It’s not linear in the sense that if inflation goes up, uh this asset goes down or vice versa.
But I would say this uh inflation has been the dominant theme driving all financial markets for.
Well, over two years, the fed initially missed the boat on the on what was causing the inflation uh felt it was going to be transitory.
It took years for it to come back down.
But ultimately, the fed acted appropriately by tightening monetary policy drastically.
And we are now debating whether or not inflation is slow enough uh to, to allow a fed easing.
That is something that was very hard to envision when the CP I was 678 or 9% year over year, uh not all that long ago.
So the inflation problem is easing up.
It has huge impacts on the cost of living for, by definition, for homeowners, for businesses.
And I think individual voters, everybody should be encouraged by the fact that inflation has slowed in terms of your your investment strategy in the context of a slowing inflation world, especially slowing inflation here in the United States.
I’d be be buying some fixed income stocks have taken off.
They’ve done very, very well.
The total returns on stocks vastly outpaced the total returns on cash or bonds over the last 12 and 24 months.
And that’s wonderful, especially for individual investors or uh institutional investors with a long horizon.
But at this point, you now face a treasury yield curve where every point point on the treasury yield curve is north of 4%.
And we think ultimately, those yields will be coming down.
Investing in cash allows you to get 5% for now.
But ultimately, when the fed does start to ease those treasury yields are gonna come down bond yields in the corporate marketplace and the Muni marketplace will come down and you’ll be getting higher price returns by taking some bond investment risk as opposed to cash going forward and stocks might have already gotten as ebullient as they can.
We like stocks and Federated and we have a decent waiting in them in our asset allocation models still a little bit overweight, but ultimately investors who are sitting in cash waiting for an opportunity to buy some bonds.
That opportunity is here.
Uh You, you can, you can feel pretty good that you’re buying bonds at a much higher yield and a better perspective, total return than over the last couple of years with the total return in bonds have been terrible.
RJ Gallo, who is the Federated Army’s senior portfolio manager.
RJ?
Thanks so much for taking the time here this morning.
Appreciate it.
Thank you for having me.
