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Inflation Low, Yields Lower

While inflation remains in check, advisers say investors still shouldn’t get too comfortable sitting in cash.

The “headline” consumer price index, which includes food and energy prices, was unchanged in November, and the “core” index, which cuts out those volatile categories, inched up 0.2%, the Labor Department said Friday morning. Over the past year, core inflation has risen 2.2%.

To economists, this is a moderate rise, and likely means the Federal Reserve won’t need to raise interest rates. But for individual investors, it’s the headline inflation rate that matters, precisely because it includes food and energy, says Jamie Cox, a managing partner at Harris Financial Group. And while that index was flat this month, it has risen 3.4% in the past year. “If you’re an investor, you’re earning virtually nothing on your investments, but the cost to operate your life is going up,” Cox says.

With interest rates are so low, investors who need some real income must look to slightly riskier assets like investment-grade corporate bonds or dividend-paying stocks, Cox says.

In fact, as worries about the global economy increase, investors are likely to move out of riskier high-yield bonds and keep buying up safer, lower-yielding products – which will further push down yields, says Rodney Johnson, the president of HS Dent.  The yield on the 10-year Treasury note is already at near record lows, at 1.854%. “Those who are seeking yield had better lock it in now,” he says. Johnson suggests looking at municipal bonds — either individual bonds or closed-end funds — or dividend-paying pipeline businesses.

Another strategy, says John Canally, an economist and investment strategist at LPL Financial, is to look for ways to take advantage of the improvement in consumer sentiment that’s likely to come with a few months of relatively flat food and energy prices. Earlier in the year, consumers were feeling the pinch from a strong run-up in prices of those necessities. Now, as those price increases slow down, budgets will be a little less squeezed, which should boost holiday sales and benefit consumer discretionary stocks, Canally says. “If you’re invested in things that are relying on the consumer, you’re a little better off,” he says.


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