I’ve known my colleague Jim Pearce for many years and he’s an affable guy. That’s a recent snapshot of him, indulging his love of expensive cigars.

But don’t let Jim’s laid-back demeanor fool you. As chief investment strategist of our premium service Mayhem Trader, he has perfected trading techniques that make a killing from market imbalances.

Jim’s also in charge of our flagship publication, Personal Finance, which covers the entire investment waterfront.

Personal Finance has been offering profitable advice in bull and bear markets since 1974.

With increasing market volatility, now’s a good time to tap Jim’s money-making insights. My questions are in bold.

Inflation is a much-discussed topic these days. What’s your view?

There is enough slack in the economy to keep inflation at bay for a while, but sooner or later the Fed will have to unwind its massive bond portfolio at which time inflation could take off.

From a political perspective I do not expect that to happen prior to the 2022 midterm elections, but I could see it happening the following year.

Watch This Video: After Inflation Scare, Markets Rebound

The increase in the U.S. money supply during the past 15 months has been substantial and threatens to weaken the value of the American dollar if some of that money is not recovered by the Fed. China has made no secret of its desire to make its currency the world’s benchmark for pricing commodities such as gold and oil.

What specific inflation hedges do you recommend right now?

The biggest risk not only to investors but all consumers is rising prices of the raw materials and hard assets that go into most of the items we purchase on a regular basis. For that reason, I particularly like Personal Finance Fund Portfolio holding Fidelity Global Commodity Stock Fund (FFGCX) to hedge against purchasing power risk.

This fund does not own commodities but instead buys shares of the companies that produce them. Its portfolio is roughly equally divided among energy, agriculture, and metals, so it covers the entire range of hard assets. Its top two holdings are oil supermajors Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX).

We’re witnessing a market rotation, from growth to value. What’s the best way for investors to position their portfolios to profitably leverage this transition?

The key is to focus on companies that can maintain profit margins and grow earnings in an inflationary environment. That means being able to pass through higher input costs to consumers and managing debt to keep net borrowing costs in line with revenues.

Watch This Video: The Big Rotation

That it is why tech stocks are faring poorly at the moment. They are net consumers of raw materials and sell many of their products on credit. As interest rates go higher, demand for those products will most likely be adversely affected. Instead, look for companies that provide basic services that are demand inelastic.

There’s an old adage: sell in May and go away. Refresh our readers’ minds and explain what that phrase means and whether it currently applies.

That adage is based on the belief that reality usually falls short of expectations, so you are better off owning stocks during the first half of the year when optimism is high and selling them before reality sets in. Historically, there is some truth to that saying since the stock market has performed slightly better during the first four months of the year than the final eight months.

According to Yardeni Research, the trimester of January through April has been the best performing four-month time of the year (+3.1%), May through August has been only slightly below that (3.0%), and September through December has been by far the weakest period (+1.6).

Long-term averages aside, each year must be evaluated on its own merits. Last year, the second half of the stock market was unusually strong due to the coronavirus pandemic. This year, I think we will see a wide divergence in performance on a stock-by-stock basis depending on a company’s ability to thrive in an inflationary environment.

Which sectors are poised to outperform for the rest of 2021?

As I noted earlier, commodity producers will perform strongly over the remainder of this year. But other than that one obvious play on higher inflation, I take a contrarian approach.

The fear of rising interest rates could drive pass-through vehicles such as real estate investment trusts, or REITs, lower since they use a lot of leverage, i.e. borrowed money, to buy income-producing assets. However, they also include automatic rent escalation clauses in their lease agreements based on the consumer price index. For that reason, I believe REITs will perform better than expected during the second half of this year.

Read This Article: “Why REITs May Be Right This Time”

I also like consumer durables companies because demand for their products should be largely unaffected by rising interest rates. However, that will allow them to raise retail prices which should expand their profit margins.

Do bonds make sense, under current market conditions?

Tax-free municipal bonds should benefit from an increase in personal income tax rates, but other than that it is difficult to imagine how any fixed-rate bond will be able to hold its value if inflation continues to go higher. For that reason, I favor adjustable-rate and convertible bonds as a hedge against rising interest rates.

Even still, I’d rather own a diversified portfolio of solid income stocks than bonds over the next 10 years. The yield on the 10-year Treasury note is 1.6%, while the average dividend yield on the entire PF Income Portfolio is 4.8%. Not only is the dividend yield three times higher, but over the next 10 years I would expect the stock portfolio to be worth far more than a bond portfolio.

Editor’s Note: My interview with Jim Pearce only scratched the surface of his expertise. As the head of Personal Finance, Jim continually scours the investment landscape for “mega-trends” that can make individual investors wealthy.

One such trend he’s looking at now is telemedicine. Due to quarantine restrictions generated by the coronavirus pandemic, an increasing number of people are resorting to remote medical consultations.

According to a new report from Grand View Research, the global telemedicine market is expected to generate revenue of $298.9 billion by 2028, for a compound annual growth rate of 22.4% from 2021 to 2028.

Jim and his team of analysts have pinpointed the best plays on telemedicine. The time to invest in these little-known companies is now, before the herd catches on and bids up their shares. For details, click here.

John Persinos is the editorial director of Investing Daily. Send your questions or comments to mailbag@investingdaily.com. To subscribe to John’s video channel, follow this link.