uploads///Performance of Income Oriented Sectors

Bernstein: ‘Inflation Is the Enemy of Income’

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Mar. 19 2018, Published 7:34 a.m. ET

Bernstein on income-oriented strategies

In the previous article, we saw that billionaire investor Richard Bernstein shared his views on tariffs and how they create an inflationary situation in the economy. He also shared his concerns about how higher inflation could affect investment returns.

Bernstein said, “Tariffs, by definition, are always inflationary, and inflation is the enemy of income.” Inflation expectations have been improving since June 2016. The implementation of the recent tariffs could further increase inflation. However, Bernstein worries about income-oriented strategies because he believes investors are ill-positioned for any steeper rise in inflation.

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Bond yield and income-oriented strategies

Bernstein also pointed out that the ten-year US Treasury yield started rising in June 2016. From June 2016 to the present, it’s risen 110%. The bond yield generally rises when the expectation for a rate hike increases in the economy. According to Bernstein, such an environment hampers income-oriented strategies, and income-oriented sectors such as utilities, telecommunications, and real estate show poor performances.

The Utilities Select Sector SPDR ETF (XLU), the iShares US Telecommunications ETF (IYZ), and the iShares US Real Estate ETF (IYR), which track the performances of the utilities sector, the telecommunications sector, and the real estate sector, have fallen 4.1%, 14.4%, and 7.1%, respectively, from June 2016 to now.

As the bond yield rises, the bond price falls because the two are inversely related. Falling bond prices signal that the bond market has underperformed the broader equity market, the S&P 500 Index. The S&P 500 Index (SPY) has risen 31.1% from June 2016 to now.

In the next part of this series, we’ll analyze why Richard Bernstein believes income-oriented investors should be more concerned about inflation.

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