Investors Scramble To Adjust Their Portfolios After Inflation Surge

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Will Kessler Contributor
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Many investors are diversifying their portfolios from standard stocks and bonds as March’s inflation surge casts doubt on economy-boosting rate cuts from the Federal Reserve happening this year, according to Reuters.

The consumer price index increased to 3.5% year-over-year in March, up from 3.2% in February and far from the Fed’s 2% target. Markets prior to March’s inflation report anticipated a few rate cuts this year, leading investors to buy up stock in anticipation that markets would rise when cuts materialize, but the increasing possibility that the Fed will not cut rates this year has led investors to switch up their market strategy, according to Reuters. (RELATED: Can Biden Quickly Reel In Runaway Inflation? Experts Weigh In)

Some equity investors are resorting to buying up options and energy stocks to hedge against persistent inflation, according to Reuters. S&P 500 energy stocks are up around 17% since the start of the year, compared to just 8% for the overall index.

The S&P 500 fell almost 1% on Wednesday following the release of the March consumer price index, while the benchmark for 10-year Treasury yields hit its highest point since November, hurting bond investors, according to Reuters. The index has added around $4.7 trillion since the Fed indicated that it would likely cut rates in 2024.

“We are heading to the possibility of no U.S. rate cuts in 2024, or at least fewer cuts than the market currently prices,” Tara Hariharan, managing director at global hedge fund NWI, told Reuters.

The Fed has kept its federal funds rate in a range of 5.25% and 5.50% since July 2023 to combat high inflation, but a median of Fed governors indicated in December there would be around three cuts in 2024. The Fed retained its predictions of three rate cuts at its meeting in March.

A majority of investors predict there will be a rate cut by September’s Fed meeting as of Wednesday, according to CME Group’s FedWatch tool.

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