Justin Ellsesser, CFA, CAIA

To many, the market turmoil that hit stocks globally last week came out of nowhere. In the US, after almost two years of the stock market grinding its way higher, seemingly in defiance of gravity, the over 5% fall last week reminded us that what goes up must come down. In truth, we’ve been living in an investing world which isn’t normal. Falls in the market like the one experienced this February however, are entirely normal, and often healthy, for markets to experience.

As far as “Why now?,” a clear reason is rarely known, but in this case the rising fear of inflation and the effects it may have on our economy and investments seem to be the source. Despite the large economic growth we’ve seen since the Great Recession, the lack of inflation to go with the growth has been disappointing and cited to be due to the lack of wage growth. Normally, it’s expected that as the economy improves and people become employed, wages will start to increase. This creates more demand for goods and services which drives prices higher, causing inflation.

“…the rising fear of inflation and the effects it may have on our economy and investments seem to be the source.”

The January jobs report, a report issued monthly on the state of unemployment in the nation, showed a 2.9% increase in wage growth, the largest since 2009. This spurred concerns that the Federal Reserve will quicken its pace of raising interest rates to combat the oncoming increasing inflation from this wage growth. Central banks raise interest rates in response to inflation in order to try to keep people from spending money, thereby causing demand to fall and inflation with it. This is done to ensure inflation doesn’t get too high, because once it starts rising, it’s hard to stop. A side effect of increasing interest rates is that it hurts the stock market due to increasing the cost of debt for companies, thereby making growth more difficult.

                LAGERS has been changing its allocation for this exact scenario for well over a year. We’ve hired four new managers in the real asset space, allocating $375 million to them in total.

Real assets – are physical assets that have value due to their substance and properties. Real assets include precious metals, commodities, real estate, agricultural land, machinery and oil.

We’ve also increased commitments to current real asset managers in several vehicles and have begun to shift our cash assets to be held in Treasury Inflation Protected Securities. These moves were made with the intention of increasing the portfolio’s exposure to areas that should react positively to increasing inflation, while reducing our overall exposure to equities and other areas most vulnerable to increased inflation. Real assets include things like real estate and commodities, items with limited supply whose prices increase as inflation increases. These moves were first identified and put in motion in early 2017, and we hope to have them fully implemented within the 2018 calendar year.

                While the large daily positive and negative swings in stocks may be startling to many, we must always remember that LAGERS is a long term investment vehicle. And your LAGERS Investment Team is ensuring that the assets in our care are allocated to provide a return in all market environments, including the environment of rising inflation we may be entering now.

For more information on our investment strategy, visit our investments page on the Missouri LAGERS website.