If you think about inflation and interest rate risk, you can sometimes see how that plays out in a portfolio in real time — particularly if you stare too closely at that portfolio every day, like I do.   And it can remind you of the value of real diversification — you want to own a variety of investments whose prices, at least in the short term, are driven by very different things.

This point stuck in my mind because of the instant adjustment the markets made to the new and slightly-more-worrisome inflation numbers that were released on Wednesday. By lunchtime on that day, the fear that the Fed would not be cutting interest rates three times in 2024, and certainly not as soon as May, led to almost everything in my Real Money Portfolio dropping, ranging from a 4-5% decline for the most interest-rate sensitive stocks, like American Tower (AMT) or some of the real “long-dated” speculative growth stocks, to a minor decline that essentially matched the market’s 1% drop for many others. A lot of that rebalanced a bit once the wholesale inflation numbers came out, and seemed a bit more calming, but it was interesting to watch the dynamics play out.

And the ones who perked up a little bit on that day were the companies who are benefitting, to some degree, from higher interest rates and, arguably, from inflation:  The insurance underwriters, who consistently buy large portfolios of bonds, earn more on those investments when rates go up, and also charge higher prices for insurance when inflation is rising (their costs go up, too, since repairing a car or home or settling a lawsuit also gets more expensive with inflation, so that part isn’t always an improvement… but the improved investment yield from their bond portfolios is a clear and almost automatic boost).  The little bright spots of green in my portfolio during that wild (and red) Wednesday were Markel (MKL), Chubb (CB), Kinsale (KNSL) and W.R. Berkley (WRB).

That doesn’t mean much over the longer term, and it didn’t stop my net worth from dropping a little bit on Wednesday (or today, for that matter), it only softened the blow a little bit (those four stocks are about 12% of my equity portfolio)… but it’s good to be reminded that a headwind for some companies can be a tailwind for others.

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