I’m Gearing Up For Inflation, And So Should You…
The economic news continues to be mixed. The unemployment rate is falling, but the number of new claims for unemployment insurance remains at record highs. Inflation is low, but inflation is certain to rise.
The good news/bad news aspects of nearly every economic report explain why Congress and President Biden continue to believe that more stimulus is needed. That same factor explains why some economists and political leaders believe new aid needs to be more targeted.
The Dreaded “I” Word
The concern is that inflation is increasingly likely. Stimulus and Federal Reserve policy are all acting in ways that could create inflation.
A new $1.9 trillion stimulus bill is working its way through Congress. This follows a $2 trillion stimulus passed last spring and a $900 billion stimulus at the end of last year. Combined, that totals out to $4.8 trillion.
The last report on GDP put the size of the economy at $21.5 trillion. So the total size of the stimulus amounts to 22% of GDP.
Fed policies have increased the money supply by $4.9 trillion in the last year. There is now more than $22 trillion in the economy.
It seems unlikely that we can keep adding money to the economy without creating inflation. For now, policymakers are counting on the bad news outweighing the good in the economy. The large number of unemployed is giving them comfort that inflation isn’t a problem.
But if the pace of the recovery picks up, many will go back to work and then the Fed might be forced to withdraw funds from the economy. This could lead to sudden changes in how investors view the economy, and it could lead to weakness in the stock market.
The first test for investors comes in May. That’s when inflation will be above the Fed’s target of 2%.
Source: Federal Reserve
As the economy shut down last year, prices plunged. If the CPI-U is unchanged from its current level, inflation will top 2.5% in May 2021.
Either way, it’s likely to be higher, and that will scare investors.
I’m preparing for that and watching market action closely. But for now, I remain confident in our ability to make smart trades in this market, thanks to the proven strategy we use over at my premium Maximum Income service.
How I’m Trading
For example, we recently made a trade on AT&T Inc. (NYSE: T).
AT&T is a complex company. But despite some recent challenges, the outlook is looking positive. As reported by Barron’s:
“AT&T management’s guidance for 2021 is for about 1% revenue growth, including 2% growth in wireless-service revenue. It also expects adjusted earnings per share to hold steady with 2020’s $3.18 and free cash flow to come in around $26 billion after a dividend payout ratio in the high 50% range and $18 billion in capital expenditures.
Echoing recent remarks, AT&T management underlined their commitment to the stock’s dividend—currently yielding 7.1% annually—while paying down debt in 2021.”
Based on the fundamentals, I believe the downside risks in T are limited. The chart shows the stock has developed significant support near the current price, another factor reducing risk.
Given all of this information, this is the part where most investors would simply pull the trigger and buy the stock. There’s nothing wrong with that – after all, that 7% yield is nothing to scoff at.
But I think the trade we recently made is a better plan. It allows us to earn income right away from the stock – while still having the chance to enjoy some upside if my bullish case is right. And if I’m not, then we’ll simply make more income-producing trades like this again – and still collect our regular dividends, too.
If you’re looking for more income and want to learn how to make trades like this, then I’m here to help.
I encourage you to check out my latest report for more details.