Investment Strategies in 2024: Navigating Inflation

Impact of Inflation on Asset Classes

Inflation's impact on asset classes is multifaceted. Berkshire Hathaway highlights the global economic threat inflation poses and the dollar's role as a reserve currency. JPMorgan Chase notes that inflation-adjusted growth will be flat, affecting business lines and investment categories. Structural inflation pressures also make forward-looking investments less compelling.

"And then it won't be the quantity. It'll be whether in any way inflation would get let loose in a way that that really threatened the whole world economic situation and there really isn't any alternative to the dollar as a reserve currency. And you get a lot of people who give you a lot of speeches on that, but that really is the answer." --- (BRK.B, event transcript, 2024/05/04)

"flat on an inflation adjusted basis. However, the mix between the categories and lines of business will naturally change over time as investments roll off and our strategic priorities evolve. So with that," --- (JPM, event transcript, 2024/05/20)

"So as we think about this $3,600,000,000 going forward, we would expect the growth to be closer to flat on an inflation adjusted basis." --- (JPM, Investor Day, 2024/05/20)

"Michael Grub: We received a question from James Amoroso who asks, what should the individual investor do with regard to the huge federal deficit and rising cost of servicing bad debt as interest rates continue to rise or hold steady? How should we invest to protect ourselves from this and inflation?" --- (JPM, AGM, 2024/05/21)

"In fact, the forwards are not sort of that compelling given our views about some sort of structural upward pressures on inflation and so on." --- (JPM, earning call, 2024/Q2)

Sector-Specific Strategies for Inflation Resilience

Companies across various sectors are employing specific strategies to build resilience against inflation. Johnson & Johnson focuses on securing preferential pricing, Procter & Gamble emphasizes consistent execution through economic challenges, UnitedHealth Group transitions to value-based care to reduce costs, ExxonMobil invests in high-value assets, and Nike reduces supply to maintain market health.

"And we've seen that, but we expect that to normalize in the back half. We remain consistent in our belief in the 5% to 7% growth for our end markets and that we will perform well within that. As it relates to pricing, inflation has not been a friend to our industry, and we have put a lot of effort into really ensuring that we can secure preferential pricing across the world." --- (JNJ, earning call, 2024/Q2)

"Our team continues to execute the strategy with excellence, enabling strong results over each of the past six years pre-COVID, during COVID, through a historic inflationary and a pricing cycle, and through geopolitical tensions." --- (PG, earning call, 2024/Q4)

"Our differentiated long term strategy is built around 2 core complementary ambitions: helping accelerate the U. S. Health system's transition to value based care by aligning incentives across care providers, health plans and consumers to deliver the highest quality outcomes at the lowest cost, while at the same time bringing to bear the full resources of our enterprise capabilities, our technology, data and clinical expertise to fundamentally empower and transform the way American consumers engage with their health care. These twin ambitions are underpinned by 5 strategic growth priorities." --- (UNH, event transcript, 2024/06/03)

"For all of our success, we're not satisfied. We continue to see a portfolio of opportunities to significantly grow value. We plan to continue investing in our business this year to grow our portfolio of competitively advantaged assets, further shift our product mix towards higher value performance products and achieve additional emissions reductions." --- (XOM, event transcript, 2024/05/29)

"But the actions that we're taking are also causing us to look at the broader marketplace in the second half of the year and ensure that we're reducing supply there as well to maintain a healthy marketplace and also to ensure that we've got capacity in the market to bring newness in." --- (NKE, earning call, 2024/Q4)

Central Bank Policies and Investment Impacts

Central bank policies are significantly impacting investment strategies. Goldman Sachs highlights potential declines in asset prices and market activities due to policy uncertainties. Citigroup and Bank of America emphasize increased central bank gold purchases as a hedge against inflation. Wells Fargo and JPMorgan Chase note the effects of higher interest rates on net interest income and customer behavior.

"If uncertainty and concerns about geopolitical tensions and the economic outlook remain elevated or grow, including those about central bank policy, inflation, the commercial real estate sector, and potential increases in regulatory capital requirements, it may lead to a decline in asset prices, a decline in market-making activity levels, or a decline in investment banking activity levels, and net revenues and provision for credit losses would likely be negatively impacted." --- (GS, sec filing, 2024/Q1)

"Much of that growth is likely to come from central banks around the world continuing to add to their gold reserves in record numbers, say the analysts at Citigroup." --- (C, press release, 2024/07/10)

"In a note to clients, Bank of America wrote: “Ongoing central bank purchases are also important, and a push to reduce the share of USD in foreign exchange portfolios will likely prompt more central bank gold buying.” The analysts say gold continues to be viewed as a long-term value store, hedge against inflation, and effective portfolio diversifier." --- (BAC, press release, 2024/06/24)

"Turning to Slide 4. Net interest income declined $1.1 billion or 8% from a year ago due to the impact of higher interest rates on funding costs, including the impact of customers migrating to higher yielding deposit products as well as lower loan balances, partially offset by higher yields on earning assets." --- (WFC, earning call, 2024/Q1)

"Our outlook for NII is to be relatively flat this year, consistent with Jeremy's central case of $91,000,000,000 a function of a modest decline in average deposit balances year on year, lower deposit margin as we continue to see some product migration in a slightly higher rate environment, offset by higher CardOS, which we expect to grow double digits continuing to benefit from normalization." --- (JPM, Investor Day, 2024/05/20)

Risk Management Techniques for Inflationary Periods

Companies are employing various risk management techniques to navigate inflationary periods. Invesco focuses on liquidity risk management, Charles Schwab uses interest rate risk simulations, and Northern Trust emphasizes strengthening resiliency. Additionally, value investing is suggested as a strategy to benefit from moderate inflation and interest rates.

"The company actively manages liquidity risk by preparing cash flow forecasts for future periods, reviewing them regularly with senior management, maintaining a committed credit agreement, scheduling significant gaps between major debt maturities and engaging external financing sources in regular dialogue. Effects of Inflation" --- (IVZ, sec filing, 2024/Q2)

"See also Risk Management – Interest Rate Risk Simulations. In response to continued elevated inflation, the Federal Reserve raised the federal funds target overnight rate four times in the first three quarters of 2023 for a total of 100 basis points before holding rates unchanged since July 2023." --- (SCHW, sec filing, 2024/Q1)

"Our second strategic priority is to strengthen our resiliency. Northern Trust plays a critical role in the global financial system, facilitating the efficient allocation of capital, managing risks and promoting economic growth.Market participants and regulators look to us to have the strongest risk management and controls possible for the benefit of our clients, the health of our industry and the stability of the global economy." --- (NTRS, AGM, 2024/04/16)

"Now may be time to take a look at US value stocks. A lower recession risk should benefit value investing in the near term, while moderate interest rates and inflation would be a longer-term tailwind, in our view." --- (IVZ, twitter, 2024/04/26)

"For a discussion of our risk management programs, see Part II – Item 7 – Risk Management in the 2023 Form 10-K. Market Risk Market risk is the potential for changes in earnings or the value of financial instruments held by Schwab as a result of fluctuations in interest rates, equity prices, or market conditions." --- (SCHW, sec filing, 2024/Q1)

Technological Advancements and Inflation

Technological advancements, particularly in computing, are contributing to inflation. Nvidia highlights the growing performance-to-demand deficit and the resulting computing energy and cost inflation. Amazon also notes that emerging technologies impact inflation, emphasizing the unpredictable nature of these factors on economic conditions.

"For nearly a decade, as the performance scaling of general purpose processing has slowed, while computing demand continued and exponentially growing performance to demand deficit has built up. If unchecked, this computing energy and cost inflation will stifle every industry." --- (NVDA, event transcript, 2024/06/26)

"Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic and geopolitical conditions and customer demand and spending, including the impact of recessionary fears, inflation, interest rates, regional labor market constraints, world events, the rate of growth of the Internet, online commerce, cloud services and new and emerging technologies, and the various factors detailed in our filings with the SEC." --- (AMZN, earning call, 2024/Q1)

"And as the world is now suffering from computing cost and computing energy inflation because general-purpose computing has run its course, accelerated computing is really the sustainable way of going forward." --- (NVDA, earning call, 2025/Q1)

"Our results are inherently unpredictable and may be materially affected by many factors, such as fluctuations in foreign exchange rates, changes in global economic and geopolitical conditions and customer demand and spending (including the impact of recessionary fears), inflation, interest rates, regional labor market constraints, world events, the rate of growth of the internet, online commerce, cloud services, and new and emerging technologies, and the various factors detailed below." --- (AMZN, press release, 2024/04/30)

"The cost of computing is growing. We are seeing computation inflation. This, of course, cannot continue. The data is going to continue to increase exponentially and" --- (NVDA, conference, 2024/06/02)

Consumer Behavior and Inflation

Consumers are increasingly focusing on value and switching products due to inflation, as seen with McDonald's and Walmart. Despite a strong job market, consumer confidence has dipped, as noted by Target. Starbucks also reports softening consumer sentiment amid pervasive inflation and global challenges.

"and experienced firsthand their renewed focus on value in an environment where significant inflation has created challenging consumer dynamics." --- (MCD, earning call, 2024/Q1)

"Certainly, has been some inflation and put pressure on consumers. And what we've really noticed, this started in early 2022, was some conscious switching amongst products and you can see that pronounced suddenly in the store, but based on what people are having delivered and our flexibility, convenience and other things that we have improved over the last few years have made a difference on our ability to serve more of our existing customers more often with more units and then meet some new customers as well, which is great." --- (WMT, conference, 2024/06/11)

"In fact, consumer confidence took a meaningful dip in April despite a strong job market and normalizing inflation." --- (TGT, earning call, 2025/Q1)

"Starbucks results for the third quarter of fiscal 2024 reflect progress against our action plans to drive traffic to our stores and realized in-store and out-of-store efficiencies, which helped partially offset the impact of continued broader headwinds in a challenging global operating environment, including softening consumer sentiment, a pervasive inflationary environment, and disruptions due to multiple international conflicts." --- (SBUX, sec filing, 2024/Q3)

"I recently spent time with our market team in Poland and experienced firsthand their renewed focus on value in an environment where significant inflation has created challenging consumer dynamics. In light of these challenges, I was impressed by the" --- (MCD, earning call, 2024/Q1)

Future Outlook and Investment Strategies for 2024

J.P. Morgan is leveraging its extensive experience in alternative investments, while Amazon anticipates increased capital expenditures driven by AI demand. Apple focuses on stock repurchases and dividends, and Alphabet expects operating margin expansion despite higher infrastructure costs. J.P. Morgan also plans market expansion and investment in talent development.

"With over 60 years of experience in managing alternative investments, $214 billion in assets under management and over 800 professionals (as of March 31, 2024), its strategies cover the full spectrum of alternatives: real estate, private equity, private credit, liquid alternative products, infrastructure, transport, hedge funds and forestry." --- (JPM, press release, 2024/06/13)

"which is adding to the number of companies moving their AI focus to AWS. We expect the combination of AWS' reaccelerating growth and high demand for gen AI to meaningfully increase year-over-year capital expenditures in 2024, which given the way the AWS business model works is a positive sign of the future growth." --- (AMZN, earning call, 2024/Q1)

"During the second quarter of 2024, the Company repurchased $23.5 billion of its common stock and paid dividends and dividend equivalents of $3.7 billion." --- (AAPL, sec filing, 2024/Q2)

"Looking forward, we continue to expect to deliver full-year 2024 Alphabet operating margin expansion relative to 2023.However, in the third quarter operating margins will reflect the impact of both the increases in depreciation and expenses associated with the higher levels of investment in our technical infrastructure, as well as the increase in cost of revenues due to the pull-forward of hardware launches into Q3." --- (GOOG, earning call, 2024/Q2)

"For many, this also includes potential expansion into new markets. Investing in Culture & People: They are also planning to invest in marketing and advertising strategies, as well as people and talent development — a particular focus for those who continue to operate in remote or hybrid models. 2024 Ranking Characteristics To qualify for the ranking, the WPO requires businesses to be privately held and woman-owned or -led with annual revenues of at least $500,000 in each of the past five years." --- (JPM, press release, 2024/05/15)