In many articles on the economy, eventually inflation is asked about – what happens if inflation and interest rates rise will the economy slow down and asset values fall? How can the middle income group (every year the number rises) continue to pay its debts or will they walk away from homes where the mortgages are greater than the value of the home (that happen in 2008). The are many methods to react to the problem or potential problem – one method is to study what do past economic cycles tell us? Norman Rothery writing in the Globe and Mail used author James O-Shaughnessy 4th edition of What Works on Wall Street and the Professor Kenneth French research. The results are high yielding stocks outperformed the markets in 1940’s, 50’s,60s, 70s, and 80s. The high yield stocks trailed in the 1930s and 1990s (internet bubble – however many high tech stocks went down on the other side of the curve – what was increased was decreased).

Linking to dividend paying stocks the lesson to learn is if you have a high yielding portfolio it will have to rebalanced because there are very few stocks of 1940s remained in the 1990s. You should not fear inflation over the long term, because large companies typically can adjust to the economic cycles if they have a monopoly or monopoly like competitive advantage over the competition. Think about utility companies and the ability for the government regulated body to raise rates to ensure profitability. As you review your portfolio ask how does the company retain its profitability and as a starting point you will be either reassured or start to look for alternatives.

There are more questions than answers, till the next time – to raising questions.