Don’t Sleep On Deflation

With a promising vaccination answer to the Covid-19 pandemic in sight, economic activity is on the rise, and trillions of dollars in fiscal stimulus are coming to aid the recovery effort. There is certainly reason for optimism about the near-term future of the economy.  However, the economy’s seemingly good news is not necessarily good news for capital markets, particularly with concerns surrounding inflation.  Evidence of inflation abounds in areas such as raw materials, home prices, energy, etc. Recent moves in the 10-year U.S. Treasury Note, from sub-1% at the beginning to 2021 to almost 1.6%, suggest an expectation for inflation.  Despite these expectations, it is important not to lose sight of the other potential enemy to a portfolio: deflation.  Bob Farrell, a Wall Street veteran with over five decades of experience in market psychology and fundamental and technical analysis, says in his 10 Rules of Investing that “When all the experts and forecasts agree – then something else is going to happen.” Remember, as investors, we must prepare for all contingencies (Diversification), so below are some tips in the event of deflation:

Hold More Cash

We all know the saying “Cash is King!” This is never truer than during periods of deflation.  If you look back to the height of the Covid-19 market downturn in March/April 2020, it was cash that held up better than any other asset.  While the U.S. is certainly not perfect and will face challenges moving forward, the U.S. currency is still the world’s reserve currency and highly desirable when times are at their worst.

Own High-Quality Bonds

Another way to provide stability in your portfolio during periods of deflation is to hold high-quality bonds.  So, what is a high-quality bond?  By high quality, I mean U.S. Treasury bonds, Investment Grade Bonds, etc.  You want to stay away from lending money to debtors with lesser credit quality (i.e., Junk Bonds) in this environment.  While these bonds typically offer higher yields, they come with a catch in that your principal is at greater risk.  During periods of extreme deflation, businesses will be under stress.  Ensure those you lend money can navigate through the stress and preserve your hard-earned principal.

Defensive Stocks

When the market is facing deflation, companies providing goods and services people “have to have” typically perform better than those offering goods and services people “like to have.” Think companies that sell necessities such as diapers, toilet paper, toothpaste, etc., and offer a safer place to be in the face of challenging economic conditions.


For weekly insights, follow The Welch Group every Tuesday morning on WBRC Fox 6 for the money Tuesday segment.

Fox 6 Talking Points:

How to Defend Against Deflation

  • Hold More Cash
  • Own High-Quality Bonds
  • Own Defensive Stocks


certified financial planner Marshall Clay wears a gray jacket and white shirt while posing for professional photo in office

Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™.  In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.

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