Sticky Inflation, Interest Rates and What Investors Should Do Next

Rate cuts were expected at the beginning of 2026. Then inflation concerns and rising energy prices put potential rate hikes back on the table. Now, the latest inflation data has changed the outlook once again.

In this episode of The Capitalist Investor, the team breaks down why inflation may remain between 3% and 4% for the foreseeable future and what that could mean for stocks, bonds, real estate, cash, annuities, and retirement income.

They discuss the potential rotation between growth and value stocks, why higher rates may benefit financial companies, how investors should review bond duration, and where to consider holding cash that is earning little or no interest.

Most importantly, they explain why investors should not make major portfolio changes every time the economic forecast shifts. The news can change quickly. A strong financial plan should be able to adjust without being completely rebuilt around each new headline.

The opinions expressed in this podcast are for general informational purposes only and are not intended to provide specific investment, financial, legal, or tax advice. Please consult a qualified professional regarding your individual situation.

Transcript

SPEAKER_02 0:00

On this episode of the Capitalist Investor, we're gonna talk about the Fed inflation and rate hikes nobody wants to talk about. The start of 2026, the Fed was expected to cut rates. Today, the Fed is expected to increase rates. And then as fresh inflation data is coming out, now we are back to status quo. So we are going to talk and dissect what we need to do, where this thing is breaking down, and what you should be doing about it with your portfolio. So yeah, so what do we what do we got going on here? Alright, so you know it there's where you want to start. So like let's just start in the beginning of the year. Uh we were they were expecting uh rate cuts. Right. You know, and then that changed somewhere recently in the last month or two, especially with like the Iranian war going on and oil prices spiking and inflation starting to creep back up, that there were gonna be rate hikes, right? Uh the rate hikes is gonna make things more difficult to try and calm down growth and inflation, stuff like that. However, um that changed recently with the most recent uh inflation data, uh CPI and and PPI uh came uh b way below uh expected numbers. And the there was a 50% chance that we would have a uh in you know in June, it was a 50% chance that we would have rate hikes. Right. Uh maybe two, if not three, before the end of the year, it went to five percent that we have any. Like that's how drastic, that's how important this this this data was actually this week for for inflation. So biggest things are you know, we those are that is where you know where hikes are going. But now we also throw in the mix that we have a whole new Fed share, right? Kevin Kevin Walsh. Um, and if you kind of read between the lines, you know, uh you know, Powell was more of a data dependent. And you kind you kind of knew what was going to come down the pike with with him. Like there was never many surprises, if any at all, with that guy, right? I think he the you know, Kevin Wars came out and said, uh we're no longer giving forward guidance. And we're I don't want to say play it by ear, right? But he's like, hey, we're going to like can we're not gonna give any forward guidance. We want to leave this very fluid because you know everyone depends on it, everyone starts, you know, the the the the stock market's a forward-looking mechanism.

SPEAKER_01 2:39

Absolutely. And I think that makes sense too. Right. I think it really does.

SPEAKER_02 2:42

Now, all right, let me ask you this question, though. But based on what I just said, if if if if Warsh is gonna be more cards to the chest uh on on Fed you know, Fed release day of what they're doing with rates can be a it can be a very volatile thing. If the market's pricing in no cuts and he cuts, or vice versa, or hikes, it that is you're gonna talk about some serious market movements, man. I in my opinion.

SPEAKER_01 3:10

So I I I agree with what you said there, but I think what just literally what just played out is why you don't need to have forward guidance for so long that people are depending on in the market because it might not actually be correct. Yeah. You know, that I think that was that was my main point I was I was trying to make. It's um it's too difficult. And you know, quite frankly, I we saw the energy prices drop when the kind of the peak of the Iranic uh Iranian crisis, uh, we got over that and and and the the strait was open and and all that stuff. And I know that is uh still very messy over there. Um, but for this conversation and for uh inflation specifically, the oil prices and the energy prices were really what was driving that inflation up. Yeah. Um and it did seem very temporary, and it did seem like it was the main catalyst for doing that. So now that we got this data that basically just uh supports what I just said, you know, that that energy prices are uh plummeting versus where they were at, um it makes sense to not have to uh hike rates two times in a row for the balance of the year.

SPEAKER_02 4:24

Yeah, and I mean, but I I can't say it's stripped off the table because um, you know, we did experience the high energy rates. It it seemed like it was temporary. Um, they're still a little bit elevated. Um, but you know, like let's talk about the things that are triggering inflation. So we got you know, we got energy, we got AI infrastructure, and we still got services. Um so energy, that's pretty self-explanatory when you know uh oil's not flowing. Um it's gonna go up, right? And yeah, I keep on I I heard another report that you know we're still um at the some of the lowest levels of our petroleum reserve. Um, so that's you know, alarming. It's down I don't know how much they can actually hold, but they have like 300 mil million barrels or something like that. Yeah. Um so that that's and it's gonna take a long time to to reduce that up. But so something needs to happen with um Iran. AI infrastructure, you know, these massive build-outs that that is creating a lot of demand for you know just materials and construction and skilled labor.

SPEAKER_01 5:33

Skilled labor, yeah.

SPEAKER_02 5:34

This is great. I mean, you know, it's a good feeling. I I don't know how long it's gonna last, right? But I mean, I was talking to my one my one buddy. It's a company that we actually own. It's quantive quantif services. So like they're they're a A-Z um construction company that really specializes on these data centers and power grids. They'll build, they'll build a data center, they'll build the energy, uh, the the the energy component, you know, with all the transformers and stuff. That they they do everything. They basically even make you know everything from they fabricate everything needed for all the coils, all this stuff. They do everything. Construction, they got carpentry, they got electricians, they walk on the site, and there's no there's no sub, they're it, right? Except maybe they go get their concrete from somebody else. But anyway, long story short, uh I had this conversation, and my buddy's a pretty high up superintendent. He goes, their backlog of work is disgusting. Like he goes, I we're gonna be busy, we're gonna be busy for years. The backlog is just extensive.

SPEAKER_01 6:39

Um, so if you're an electrician, you're you're making like $250,000 a year on these giant data center projects. And I forgot who I was listening to talk, it might have been Kevin or Lear Kevin O'Leary. Um, but they said that just in that sector alone, they need like an additional 70,000 electricians just for those projects. And it's just it's just you know, uh they they can they can call the shots, man.

SPEAKER_02 7:08

Oh, they're they're calling the shots on like how much they yeah, like hey, if you need me, I need a fifty thousand dollars more.

SPEAKER_01 7:13

Yeah, if you want to build this data center, you got no choice. You're you're you're hiring those people. So uh the skilled labor, um I think is is great overall for the country. Um if if um if you know my son was of col or son or daughter was of college age, um, I would tell them to seriously consider you know the those routes of those skilled uh skilled uh electricians, things like that, because it's it's the future. Yeah, it really is. You know, it's it's job security.

SPEAKER_02 7:44

It is um well there, I mean there was just a huge push to go to college. I I I know when I was in high school, you know, EMs ago, god 25 years ago. Man, it's 25 years, maybe just maybe between 25 and 30. Anyway, um it's just a big push. Like, who wasn't going to college? You know, like that's what and it the the the trades and everything was left behind, yeah. Yeah, unfortunately. But hey, uh a resurgence in that is great. And then we also have services, you know, wage growth remains elevated on service sector, so you know that's keeping things sticky, it's you know, keeping margins compressed and stuff like that. So uh again, the June inflation numbers came in and they were supposed to be over four and they were three and a half. So that's a that's a big deal. And the forecast though is inflation's going to be relatively steady. So in this like three percent, you know, this three to four percent range for the foreseeable future, they're not expecting it to dip under three for till almost 2028. Yep. So we might have these I I thought they were gonna cut rates, you know. I'm like, man, the it because one of the areas, and we'll talk about it here shortly, is like the housing sector. Right. What a we talked about it last week, but what a what a cluster. Yeah, and you know, like how housing in in in is just such a it's so expensive right now, and it's and there's there might not be any relief for quite some time. Yep. So unless they just start building more houses and now you just flooded with supply.

SPEAKER_01 9:19

Um Yeah, I saw a meme uh when I was scrolling last night. Uh it was like RIP to the real estate agents in 2022 who said uh you could just buy now and refinance in a couple years. Yeah, because that ain't happening. Yeah. And I, you know, I think um, you know, we're we're we have uh you know swings and and uh misses and but we we've been saying pretty much the same thing on inflation for really since um 2021, honestly. You know, we we we never thought it was gonna dip below three percent. Um and we thought you know a range between three and four percent um was going to be the new normal for a while. Yeah. And I think that's going to continue to play out.

SPEAKER_02 9:59

Yep, I do too. And then because energy, I don't see energy going any, you know, any lower anytime soon, really. I mean, yeah, a couple barrel barrel of oil and stuff could fluctuate back to 60, it could go back up to 100, who knows, right? Couple a couple bombs get tossed to each other, and the next thing you know, um, we got spiking inflation and the energy again. But the biggest thing is is that they you know, I think the Fed, the new the new Fed chair needs to be very careful because they don't want to repeat what happened in 2021. Yep, exactly. They some some can argue that Powell um hesitated too long uh and didn't increase rates fast enough, and that's why we saw near near double digit inflation, right? It was crept up to nine, right? And so we gotta I don't think we're in any type of situation like that, where you know supply chains are broken across the you know, across the whole grid, right from you know, energy and food, and I mean everything was just broken because no one could go to work because they was you know staying home and stuff, right? Working home kind of stuff. But anyway, so I'm sure that's on the top of his mind. And uh, but they're you know, Warsh at the end of the day, the his tone was like, Hey, I'm not gonna make decisions based on politics until he does. Anyway, sorry. Uh I'm not I'm not pre-alluding that I feel that way, but I always thought that you know the new Fed chair got the job because uh you know Trump's like, hey, uh, you know, whoever gets in this thing, you should better you should think about cutting rates immediately when you get in there. Yeah. I would thought that was the prereq to get the job, and it's just not being talked about right now. So we'll see.

SPEAKER_01 11:41

Um all right. So what does it mean for uh retirees with uh you know the inflation and you know I think um I think you know the let's do this.

SPEAKER_02 11:54

Okay. So there's there's hikes and there's cuts.

SPEAKER_01 11:59

Right.

SPEAKER_02 11:59

What happens when there's a cut? What what what what like think about like let's talk about like hey, the market was expecting the cuts, what started happening? And when you start taking a look at the cut, higher you know, higher rates are bad for um levered companies. So if we start cutting and it's m easier for people to borrow money or cheaper, you know, levered companies will should succeed. Right. Uh when you start when you start, you know, uh you know, hiking, that is where these smaller companies are gonna get really beat up because now it costs more to leverage their debt.

SPEAKER_01 12:36

Yep. And we've kind of seen that, right? So over the last uh couple of years, we've kind of seen the the value stocks out outperform the gross stocks. Um and if you know if we were expecting more rate hikes, that was probably um, you know, a nice tailwind for those value stocks. Now that uh this new data came out and inflation might not be as hot as expected, and we might not have to increase rates, maybe we just stay the status quo for a while. Um that could maybe trigger a a rotation back more towards the the more growth y stocks, the more tech stocks.

SPEAKER_02 13:14

Yep, exactly. And and what yeah, so uh the other thing is now with the bond market, you know, if there's if if anything's gonna happen, you know, uh outside of the status quo, um would be a a rate hike, is what I would really assume. And if there's hikes, that means you know, we start need to start taking a look at the bonds, and because it's a double-edged sword, your asset will go down, but the interest rates will go up. Right. Um now if your asset goes up, one thing that you could start taking a look is that it can create paper losses, which could be good for tax lost harvesting, right? You know, down the road. So or or towards the end of the year. I know that our our investment team does that on a you know, towards the end of the year all the time. So in the last couple years has been pretty, you know, it's benefited, right? Right. People have to pay taxes, they're not happy about that, but we also want to take the paper gains and make them real gains. That's the way I would describe that. Um real estate's gonna suffer. We just talked about that, but some of the other winners are gonna be financial stocks, uh, particularly like well-capitalized regional banks. Yep. Uh, just because with higher rates, their margins go up. You know, if you got a three percent a three percent interest rate, where can they really go? Right. But if your interest rates are six or seven, you can hide more uh spread in in those numbers, unfortunately. I don't want to say it that way. But how do you take advantage of that? You might be, you know, you you might be on the bad end of you know uh of debt and things like that, but if you're not, how do you take advantage? Well, you invest in financial stocks, you start taking a look at, you know, they're already the the financial numbers are coming out for earnings already, and you know, everyone's doing well. Yeah, everyone's doing really well. So think about JP Morgan Chase, Bank of America, um, you know, Goldman Sachs, they're all gonna do well. Uh, you know, because they're they have multiple arms of selling their businesses, they got their investment arms, they got their lending arms, and every every one of them are are doing fantastic. Yep, for sure.

SPEAKER_01 15:18

So um yeah, I'll mention something here as well, um, since I I always toss it in. But um in an increasing uh interest rate environment does make those annuity products more attractive. So um I only bring that up again just because I've I've seen a couple clients recently uh that have just gotten their annual statements, and you know, I'm not telling everyone to go out and buy annuities, okay? You need to do that through uh a plan and a financial professional, but the ones that that we I was looking at recently, I saw like a 12% gain uh in in one year on you know just a growth, a plain old growth annuity product. Um, so as you know, retirees are wanting to get more conservative in retirements, those are can be good vehicles for them because there's a lot more upside with those products.

SPEAKER_02 16:08

They're not designed to do that, you know, to be honest, right? And when they do, man, you go take a victory lap because they because they're not designed, they're designed for mid-single digits at the most, like to act more like a bond. Um, and then the the cherry on top is that that 12% is probably locked in forever. Yeah, but you can't you marketing go down 20%, you still get to keep your 12. Exactly. That's nice. Um, other things are like short-term, you know. So if you got cash, you know, interest rates are gonna be status quo if not increasing. Uh idle cash. Look for reoccurring monthly CDs. You you know, Schwab's got a money market paying near four percent. I do that with a lot of clients. Like you can have access to your money, it's not locked up and it's it's ultra liquid. Um T-bills, right? And then also think about this is that you know, as inflation is kind of you know uh heaving left, right, up, down, things like that. We we have to just make sure and know, understand that social security, the cost of living adjustment penalties, um, you know, those are gonna be those are gonna get helped as well. Because if interest rates are going up, that means inflation's going up. So that could be good for your social security. Uh, it's just gonna drain the trust fund a little faster. Yeah and not good for you and me. Again, the social security thing, we can maybe we can probably dig that up again. But man, what a I I was talking about that in a presentation a week or two ago, and all the maybe we we resurfaced that one of like what happens because they did change on the Social Security when they're gonna when that trust fund's supposed to run out of money. It went from 2033 to 32 now. Right. So again, not only are we getting closer to the number, the number's getting closer to us. It continues to happen. So maybe we um we we talk about that again in the near future. Absolutely. All right, so what do we do? You know, we just talked about interest rate hikes, cuts, status quo. Basically, this this is your checklist. You know, shift any you know, excess cash from standard savings accounts, earning virtually zero to short-term treasuries, money market funds. Again, I talked about the Schwab one, uh SWVXX. I mean, it just pays somewhere between three and a half and four. It fluctuates on a day-to-day, but you can buy it today, it's active tomorrow, you can sell it today, it's liquid tomorrow, and you know, uh so it's not like you're tying up your money, which is nice. Uh review your bond, uh, you know, your bonds, uh, the duration, considering shorter uh switching to maybe shorter stuff. Um, and that's why you know our team is doing what they're doing. Their investment team is, and that's what we see a lot of is a lot of the short duration stuff right now. Um assess your technology heavy concentrations, uh sector rotation, um, away from growth is it has been under under you know on its way. So if interest rates do go up, this could be you know a headwind for these more leveraged companies, is what I'll call them. You know, away from you know, away from growth and and gravitate towards value. And then um the thing is, is uh it's not a it's not a you know uh I'm going I'm at a hundred miles an hour, then zero, and then a hundred. This this do not make drastic changes, right? Because again, the beginning we're talking six months. We were supposed to cut rates, and then we're gonna hike rates, and now we're not doing anything. And this happened within six this happened within six months, right? Seven months, right? So just pump your brakes, you know. Um, don't make anything drastic. You can start rotating slowly, you know, over the next few months. Um, because who knows, maybe next year's or next month's data is gonna change because the price of fuel did catch up to inflation. So any any closing words on on anything?

SPEAKER_01 20:04

Yeah, you know, I think uh the the last point that you just hit was was um was the one I wanted to make sure we we uh hit on. You know, it's we're we're just adjusting these things as we go. Um we don't need to be making giant swings uh either way. We don't need to be overreacting with the news. As we just talked about for the last 15 minutes, the news can the news can change pretty quick. So, you know, make sure you got a an overall straight uh strategy uh and plan. Um, and you know, I see all these percentages on the internet too, uh, especially when it comes to LeBron James. Like these are just public markets, um, just like the percentages of people that think are going to hike rates or cut cut rates. You know, it's not necessarily gospel that these things are going to happen.

SPEAKER_02 20:50

Yeah, I I mean honestly, I think the path is nothing.

SPEAKER_01 20:53

Right.

SPEAKER_02 20:54

Because I mean, look how math look how fast it changed. Unless something I think drastically changes, I think we're just stuck in our three percent plus or minus inflation, you know, like I said, three to four. I don't think nothing's gonna happen because they're still gonna just wait for a trend, and a trend's probably three or more, right? Three or more consecutive, you know, uh movements and inflation up or down. Um, because once inflation spikes next week, then they're gonna be like oh man, they're back to cut. Right, exactly. But are they?

SPEAKER_01 21:24

Yeah, so don't be whipsaw whipsawing your portfolio around based on on the news. You know, you know, stick to stick to what what you know, stick to your plan, you know, make sure you have your income planned out and you make adjustments along the way as more news and and more information is available to you.

SPEAKER_02 21:40

Yeah, I mean the only I mean it's not it's it's probably the worst news of what I've read out of all of this is that inflation's here to stay. You know, like in this 3%, 3% to 4%, we ain't gonna get below three for quite some time. And they're talking 2028, and man, a lot of things can happen literally overnight. Yeah, not we're talking two years away. Like okay.

SPEAKER_01 22:01

So all right, Dee, take us home. All right. Well, thanks for listening this week. Uh, if you guys have any questions or comments, uh hit us up at info at SWPconnect.com, and we'll talk to you next week.

SPEAKER_00 22:13

The opinions expressed in the podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any investment. Legal, financial, or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.