As longtime readers know, I’m especially cautious about trading during earnings season. Over the next two weeks, 293 companies in the S&P 500 are expected to announce earnings for the second quarter of the year. That’s an unusually active earnings calendar, and trading ahead of all that news requires accepting a large amount of risk.

As a matter of principle, I’m risk averse. I don’t recommend positions that will be open when a company announces earnings, so that limits potential trading opportunities.

By the end of last week, we had reports from 18 companies in the index. The results are significantly better than expected, with 16 of the 18 beating earnings estimates and 17 delivering better-than-expected revenue.

As a group, these companies reported earnings that are 16.8% above the estimates. If this keeps up, it will be an incredible quarter. For the full quarter, analysts expect earnings growth of 64.0%. That would be the best quarter since Q4 2009, when earnings grew by 109%. That was also a time when we were coming out of a recession.

We can’t know for certain whether history will repeat itself this time around, but there are reasons to be concerned that we may actually see a selloff, as inflation could spark selling in the next few weeks.

The Specter Of Inflation

On Tuesday, the Bureau of Labor Statistics reported that the Consumer Price Index (CPI) jumped 5.4% compared to June of last year. That was the largest year-over-year increase since 2008.

Policymakers sought to explain that inflation is temporary. According to The New York Times, “The Biden administration quickly pointed out that much of the move was tied to temporary supply issues: Prices for previously owned cars and trucks rocketed higher and accounted for more than a third of the increase.”

Fed officials were also trying to calm traders and reassure consumers. “We expected a pop in inflation like this,” Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, said on Tuesday in an interview on CNBC. “Demand came back faster than supply, and there are these temporary bottlenecks. Right now, it’s really — remain steady in the boat, don’t read too much signal into any month of data.”

Officials are correct that used car prices have moved sharply higher.

Source: Manheim Consulting

Used car prices are up 34.3% compared to a year ago. While they may come down some, unless there is a recession, used car prices are unlikely to drop much. The same is true for many other prices.

I believe inflation will last into next year. One reason I expect to see more price gains is based on how Social Security cost of living adjustments (COLA) are calculated. The Social Security Administration explains, “A COLA effective for December of the current year is equal to the percentage increase (if any) in the CPI-W from the average for the third quarter of the current year to the average for the third quarter of the last year in which a COLA became effective.”

In other words, the COLA for next year is based on inflation readings for July, August, and September of this year.

Assuming inflation is unchanged over the next three months — an unlikely scenario — the COLA adjustment will be 5.0%. This will drive salary gains of a similar amount for millions of union employees, especially government workers, along with others who will see a salary increase in January.

As those pay raises take effect, inflation will spiral higher.

Closing Thoughts

It’s important to watch how companies address inflation in the conference calls after they announce earnings. We will have hundreds of these calls in the next few weeks, and the wrong words from CEOs could send traders into a panic. For now, to manage risk, I am not entering any new trades this week, while keeping a close eye on my current positions.

In the meantime, while I spend most of my time discussing trading, I should point out that one of the best ways to protect yourself against inflation is to have a solid stream of income payers in the core of your portfolio…

That’s where my colleague Nathan Slaughter comes in. He recently released a new special report on 5 “Bulletproof” income payers that you can count on to protect your portfolio in ANY market. These stocks have weathered every dip and crash over the last 20 years and STILL hand out massive gains like clockwork.

To check out his report, go here now.