As green shoots continue to pop up and give hope that a depression has been avoided, it's important to recognize that there still are significant headwinds facing the U.S. and global economy.
In fact, with oil at $70 a barrel and Treasury yields rising, there's a real chance that we may
face a menace that proved to be destructive for investors portfolios decades ago: Stagflation.
A stagnant economy coupled with inflation can cripple returns as corporate earnings face headwinds and interest rates rise. Higher borrowing and product costs decrease consumer purchasing power. Stagflation is a very destructive force that requires a proactive investment strategy.
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Commodities are the natural beneficiary of higher inflation. Grains, energy, and metals all tend to do well in inflationary environments. If, however, the economy shows growth, these assets will likely do well as tangible investments tend to rise as interest rates rise.
Companies that pay dividends can help a portfolio strategy even in a rising interest rate environment as they provide cash flow as you wait for share price appreciation. And look for strong balance sheets and superior free cash flow when selecting stocks; these should be the screening criteria for equities that you own in a stagflation environment.
Though dark clouds may be lifting from economies around the world, it is still destined to be a stormy environment for some time to come. With lower GDP growth and global inflation likely to appear, it's going to be a tough investment environment. Be proactive — it's how you survive stagflation.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). Michael oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.