A Framework for Thinking About Rising Inflation: Think Function, Not Form
1 Stagflation is a condition in which growth is falling but inflation is rising.
2 Gross domestic product (GDP) is the monetary value of all the ﬁnished goods and services produced within a country’s borders in a speciﬁc time period.
3 Treasury inflation-protected securities (TIPS) are Treasury bonds that are adjusted to help eliminate the effects of inflation on interest and principal payments, as measured by the Consumer Price Index (CPI).
4 REIT, which stands for Real Estate Investment Trust, is a company that owns or manages income-producing real estate. REITs are dependent upon the financial condition of the underlying real estate. Risks associated with REITs include credit risk, liquidity risk, and interest-rate risk.
5 Emerging Market Debt (EMD)
6 A commodity is food, metal, or another fixed physical substance that investors buy or sell, usually via futures contracts.
7 Real yield is a yield that has been adjusted to reflect the effects of inflation.
8 Duration is a measure of the sensitivity of an investment’s price to nominal interest-rate movement.
9 Consumer price index (CPI) in the United States is defined by the Bureau of Labor Statistics as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”
10 LIBOR (London Interbank Offered Rate) is the world’s most widely used benchmark for short-term interest; it is the interest rate at which banks bank borrow funds from other banks in the London interbank market.
11 Beta is a measure of risk that indicates the price sensitivity of a security or a portfolio relative to a specified market index.
The views expressed here are those of Nanette Abuhoff Jacobson. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams and different fund sub-advisers may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.
All investments are subject to risk, including the possible loss of principal. Foreign investments can be riskier and more volatile than U.S. investments due to the adverse eff ects of currency exchange rates, differences in market structure and liquidity, as well as political and economic developments in foreign countries and regions (e.g. “Brexit”). These risks are generally greater for investments in emerging markets. Fixed Income risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall; these risks are currently heightened due to the historically low interest rate environment. Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Municipal securities may be adversely impacted by state/local, political, economic, or market conditions. Investors may be subject to the federal Alternative Minimum Tax as well as state and local income taxes. Capital gains, if any, are taxable. Commodities may be more volatile than investments in traditional securities. Bank loans can be difficult to value and highly illiquid; they are subject to credit risk, bankruptcy risk, and insolvency. Risks of focusing investments on the healthcare related sector include regulatory and legal developments, patent considerations, intense competitive pressures, rapid technological changes, potential product obsolescence, and liquidity risk. The value of inflation-protected securities generally fluctuates with changes in real interest rates, and the market for these securities may be less developed or liquid, and more volatile, than other securities markets. The main risk of real estate related securities is that the value of the underlying real estate may decrease in value.