Dow Jones Industrials 33,761.06 +2.92%, S&P 500 4,280.15 +3.26%
Nasdaq Composite 13,047.19 +3.08%, US Ten Year 2.849
The equity markets got a boost this week after Wednesday’s CPI (Consumer Price Index) number, which came in below market estimates. This highly watched metric came in at +8.5% over the last 12 months. That was better than the +8.7% consensus number analysts were forecasting, and it also marked a notable decline from June’s +9.1% increase. Equity markets cheered the news, as it marked the first month out of the last 18 months that inflation results came in LOWER than expectations. The tech-heavy NASDAQ closed nearly 3% higher, and the S&P closed up over 2% on the day of the release.
(See chart below for a breakdown of the categories within the release.)
Why Are Markets So Happy with the Inflation Print?
While equity investors cheered on what appeared to be an end to a peak in inflation, the U.S. economy still has quite a way to go before reaching the Federal Reserve’s longer-run inflation goal of 2%. The 8.5% reading does mark a reversal of a peak, but it’s still a very high inflationary metric. For those of you who live on the east coast and the mid-west, it’s almost like walking outside and being relieved that it’s only 95 degrees after a string of 100-degree days. Yes, it’s not as hot as it has been, but it’s still 95 degrees! And it’s going to be quite a while before we get down to the comfortable 75–80-degree season.
Investors are Not All Bullish
Notwithstanding the recent rally in equity markets, many investors are still skittish about diving back into equity markets. They are instead holding sizable cash balances, as cash provides three things: 1) Safety, 2) Liquidity (if there are cash needs) and 3) a Cushion for other “risky” assets they own.
In response to the above we would point out that holding cash is NOT a riskless position. Using the “Rule of 72” and the current inflation rate of 8.5%, a cash position of $100,000 would lose one-half of its value, 50% of its purchasing power, to inflation in under 8.5 years. We have a much better option for those of you who want safety and liquidity while generating a return to protect against inflation.
Treasury Bills – No Bells and Whistles, But Returns are now Appealing
For those investors seeking safety of principal, liquidity AND a respectable return, the fixed income market has become more generous over the past few months than it has been in decades. To give some context, at the time of writing, 6-month U.S. Treasury Bills are yielding ~3.023%. As far as liquidity is concerned, the market for U.S. Treasuries is typically one of the most if not the most liquid market in the world. In a pinch raising cash can be done at the press of a button, with trade-day plus one day settlement. Lastly, in terms of safety of principal, U.S. Treasuries are backed by the full faith and credit of the United States, and are considered “risk-free assets.” (See attached Investopedia Link for further explanation).
So, for those of you out there who are not yet convinced that we’re out of the woods in terms of inflation and equity market volatility, please talk to your advisor at M&R about opening a short-term bond-oriented account as opposed to sitting in cash. This type of account can be set up very quickly, offers safety of principal (if invested in Treasury bonds), while still offering attractive returns and a cushion against the inflation beast that is still looming large. Don’t let inflation eat away the value of your hard-earned cash – let M&R, and the power of yields, work for you.
CONFIDENTIAL AND GENERAL NOTICE:
All information herein has been prepared solely for information purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.
The view and opinions expressed in this message and any attachments are the author’s own and may not reflect the views and opinions of M&R Capital Management, Inc.
 The Rule of 72 is a popular formula used to estimate the number of years until an investment will double, or in the case of inflation, be cut in half.
 This does NOT factor state tax rates, which are exempt when purchasing T-Bills. The effective rate those living in states with a high-income tax level would be even higher.