By Nancy Tengler

Special to USA Today

The Holy Grail for many investors is the quest to find a perfect indicator, something that consistently provides direction. We may have found one, though not exactly where we expect.

Enter Federal Reserve Chairman Jerome Powell. In a recent testimony before Congress, Powell suggested that it was time to retire his now famous reference to “transitory” inflation. Having been dead wrong about the strength of inflation throughout the spring and summer and fall – insisting it was transitory despite persistently high and growing levels of inflation, far exceeding the Fed’s own forecast – the Fed chair may in fact enshrine himself as the perfect contrary indicator.

Why? Because the fourth quarter of 2021 may indeed represent peak inflation in the United States just as he is retiring his transitory characterization.

The November consumer price index (CPI), reported Friday, was an eye-popping 6.8% – the highest level since June 1982. In the second quarter of this year, the U.S. economy as measured by gross domestic product (GDP) likely hit peak growth. Corporate earnings growth peaked as well. The third quarter brought us peak monetary easing. Could it be that the fourth quarter will mark the height of supply chain disruption and the crest of inflationary trends?

It may be wishful thinking, but we could be on the edge of a reprieve of sorts.

The Atlanta Fed produces a monthly metric called sticky-price CPI. Sticky items are those slow to change price as a measure of a kind of sustainable, core inflation. That number rose 4.0% in November, after increasing by 5.9% in October. It would be naïve to think that prices will ease quickly and materially but the Atlanta Fed’s report was a move in the right direction. Consumers are still experiencing increases in used car pricing, housing and food. But investors look at expectations – the marginal unit of inflation if you will – and we may be approaching a high-water mark.

In the face of slowing growth potentially moderating inflation, and a more hawkish Federal Reserve, how do you position your portfolio as we calendar into 2022?

Bonds have enjoyed a 40+ year bull market so it is hard for many investors to flee the asset class. But as readers of this column know, I have been arguing for 18 months that bonds were riskier than stocks and the intermediate indices for bonds have tread water near the flatline while stocks prices have soared. If we are wrong and inflation continues to rage, the Fed may begin to raise rates in the spring and that will put further pressure on bond prices.

The most amazing thing about the third quarter earnings season was the strength in profit margins. Not only were most companies able to maintain them but many were able to expand margins above expectations. Margins remain at historical highs. This will be something for investors to watch, but consider increasing your exposure to companies who have pricing power. Look at names in the consumer discretionary space, semiconductors, cloud technology companies and cyber security. These companies should be able to maintain their pricing power and growth – the sweet spot when economic growth is slowing.

Many of the work-from-home winners have already had the wind taken out of their sails. Resist the temptation to re-engage with those names and focus on companies with real earnings, strong free cash flow and strong balance sheets. Dividend growers are especially appealing during times of rising inflation.

Volatility may be here to stay for some time, embrace it as an opportunity to reposition your portfolio for the next leg of the economic cycle. In the old days, when inflation was a given, clients were advised to invest in stocks as the best hedge against inflation.

That is an indicator you can rely on.