Download April/May 2015 by Thomas S. Moore, CFA

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THE EVOLUTION OF FINANCIAL INTELLIGENCE
T H E
S E A R C H
F O R
I M M O R TA L I T Y
T E C H N O L O G I C A L A N D G E N E T I C
E X P L O R A T I O N S T H A T
A R E R E V O L U T I O N I Z I N G H U M A N L O N G E V I T Y
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E DI T ION 02
Wayne, NJ
Leading Wealth Advisor
Hallmark Capital Management, Inc.
Steve Erikson, CFP®, President and Chief Executive Officer
George R. Kress, CFA®, First Vice President
Thomas S. Moore, CFA®, Executive Vice President, Chief Investment Officer
Cynthia Bechmann, Senior Vice President, Chief Operating Officer
How does inflation
affect investments?
By Thomas S. Moore
Changes in the rate of inflation affect,
either directly or indirectly, everything from the level of bond yields
to stock market price-to-earnings
ratios, commodity prices, foreign exchange ratios and effective income
tax rates. The inflationary 1970s distorted all markets, but taming runaway inflation in the 1980s set the
stage for a two-decade bull market for
stocks and bonds. The conclusion?
Inflation rates matter tremendously.
So far this cycle, most of the potential
inflationary effects from the upsurge
in the money supply have been offset
by the sluggish economy. Weak macroeconomic conditions, however, can
restrain inflation only as long as they
endure. Once the economy improves
and downward pressures lighten, one
would expect that higher inflation will
begin to reassert itself. The signs of a
cyclical upturn in inflation should become clearer as unused capacity and
labor return to productive economic
pursuits. Initially, any rise in inflation
may be slight, but it could be persistent.
Furthermore, it appears as if the
Federal Reserve wants to see a higher
rate of inflation, and we believe the
Fed has the means to achieve it.
Rightly or wrongly, its leaders believe
they have the tools to contain inflation
if it starts to accelerate too fast. That is
a risky strategy but could turn out to
be a good trade-off. Living through a
short period of time with 2- to 3 percent
inflation could be a small price to pay
if it ultimately means achieving an
extended period of strong economic
growth with full employment.
Many investors fear that higher inflation rates will stop the stock market
dead in its tracks, but history does not
bear this out. There is a relationship
between inflation and how investors
value stocks, but it is not a simple
one. The most direct impact of higher
inflation rates on stocks is to lower
overall price-to-earnings ratios, which
can cause a short-term dip. These have
often turned out to be worthwhile buying opportunities, because higher
rates of inflation bring better corporate
pricing power, helping to boost profit
margins. The positives from faster
earnings growth offset the negatives
from lower price-to-earnings ratios.
The Standard & Poor’s 500 index
has posted average annualized returns above 14 percent when inflation rates were very low (0- to 1.5
percent), but index returns were almost as good, at 13 percent, when inflation rates were higher (1.5- to 3
percent). As inflation rates climb
beyond 3 percent, however, the effect shifts from positive to negative
for stocks, and returns become progressively lower. Since inflation would
be rising from extremely low levels,
it should be a while before we have to
worry about rates persistently above
3 percent.
Bond yields still provide comparatively poor rates of return versus the
earnings yield on stocks. In the past,
it was only when bond yields began
to reach a level close to the economy’s long-term nominal growth rate
that investors thought of bonds as
serious replacements for stocks on a
risk-adjusted basis. In today’s environment, bond yields would have to
top 5 percent to hit that target. Until
then, we believe optimism for stocks
is warranted.
This article is not intended as investment, legal, accounting or tax advice. Any opinions, recommendations or indications of past performance contained in
this article may be subject to risks and uncertainties beyond the control of Hallmark Capital Management, Inc. (Hallmark) and are no guarantee of future
returns. Hallmark does not guarantee or certify the accuracy, completeness or timeliness of the information presented in this article. Hallmark is an investment
advisor registered with the U.S. Securities and Exchange Commission. Registration with the SEC does not imply that Hallmark or any individual providing
investment advisory services on behalf of Hallmark possesses a certain level of skill or training. © Hallmark Capital Management, Inc. All rights reserved.
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How to reach Hallmark
We are delighted to offer our services and
welcome the opportunity to speak with you.
Steve Erikson, CFP®, and George R. Kress,
CFA®, can be reached at 973.808.4144.
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“Once the economy improves and
downward pressures lighten, one
would expect that higher inflation
will begin to reassert itself.”
MAKE
—Thomas S. Moore
H A L L M A RK CA PI TA L M A NAGE ME NT, I NC.
Standing, left to right: George R. Kress,
Thomas S. Moore; seated, left to right:
Cynthia Bechmann, Steve Erikson
About Hallmark Capital Management, Inc.
ILLUSTRATION BY KEVIN SPROULS
Hallmark Capital Management, Inc. (Hallmark) is dedicated to empowering clients to attain their financial
goals by providing objective investment management and financial planning services. Hallmark employees
remain committed to maintaining the highest degree of professionalism and integrity, while using their best
judgment and wisdom on behalf of clients, as they have for more than 25 years. They have a fiduciary duty of
care, loyalty, honesty and good faith to always place the best interests of clients ahead of their own.
Assets Under Management
$808 million (as of 12/31/13)
Financial Services Experience
Erikson, 30 years; Kress, 24 years; Moore, 34 years; Bechmann, 30 years
Minimum Asset Requirement
$500,000 (for investment services)
Professional Services Provided
Planning and money management services
Number of Clients
353 (as of 12/31/13)
Website www.hallcapmgt.com
Primary Custodian for Investor Assets
Multiple—please inquire
Hallmark Capital Management, Inc.
Email [email protected]
[email protected]
1195 Hamburg Turnpike, Wayne, NJ 07470
973.808.4144
WORTH.COM
A P R I L- M AY 2 0 1 5
085
Steve Erikson, CFP®
President and Chief Executive Officer
George R. Kress, CFA®
First Vice President
Thomas S. Moore, CFA®
Executive Vice President, Chief Investment Officer
Cynthia Bechmann
Senior Vice President, Chief Operating Officer
Hallmark Capital Management, Inc.
1195 Hamburg Turnpike
Wayne, NJ 07470
Tel. 973.808.4144
[email protected]
[email protected]
www.hallcapmgt.com
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