We’re still enjoying a bull market, but conditions are getting choppy and risks are increasing. This week, the Federal Reserve rattled Wall Street by suggesting interest rates could rise sooner than expected.

For insights, as well as specific advice on how to trade now, I turned to Nathan Slaughter, chief investment strategist of our premium trading services, Takeover Trader and High-Yield Investing. That’s him, pictured below. My questions are in bold.

We’re witnessing a market rotation, whereby investors are turning to small-caps and value stocks. Elaborate on this trend.

Value stocks everywhere (particularly small caps) have finally mounted an incredible comeback. And it didn’t happen a minute too soon. Investors had just about given up on the entire asset class.

There are numerous academic studies proving that value holds the long-term edge over growth. That’s why countless funds track “intelligent” custom indexes flavored with value metrics such as high return on equity and low price-to-book.

We also know that legendary investors such as Warren Buffett (and his mentor Ben Graham) crushed the market by favoring stocks trading at a measurable discount to their inherent value.

Watch This Video: The Big Rotation

But the fact is, value stocks (including most dividend payers) have been playing second fiddle to growth stocks like Apple (NSDQ: AAPL) and Amazon (NSDQ: AMZN) for well over a decade. This trend started at the tail-end of the 2009 recession and has been firmly in place ever since, with growth outrunning value in 11 of the past 12 calendar years.

The gap has been so persistent that the whole “buy low, sell high” notion had almost become a bit quaint. Sure, value had some great years. But like a washed-up former sports star, maybe value was past its prime and needed to retire. Investors abandoned this group in droves last year, yanking away more than $70 billion in assets from domestic value funds. However, value has made a huge comeback lately, with smaller stocks leading the charge.

During the pandemic era, we’re witnessing an explosion in initial public offerings (IPOs) and mergers and acquisitions (M&As). In the context of this corporate deal-making, which sector looks the most appealing to you right now?

I can’t think of another sector with such a long and wide growth runway as health care. Trillions of dollars are being thrown around with no signs of slowing. Opportunities abound, from tiny biotech drug developers to surgical device and lab instrument makers to the insurers cashing all those monthly premium checks.

Read This Story: Red-Hot IPOs: Don’t Get Burned

Of course, this sector is also ripe for buyouts. Take the pharmaceutical industry. Facing the loss of patent protection for core products, deep-pocketed drug makers are gobbling up smaller firms with exciting new therapies to rejuvenate their pipelines.

Inflation has been running hot lately. How worried are you?

When it comes to inflation, I feel a bit like the boy who cried wolf too many times. Just like the parable, I’m afraid my warning may fall on deaf ears because there have been too many false alarms.

As chief investment strategist of High-Yield Investing, I’ve been harping about the dangers of inflation for years. To be fair, fixed-income securities are highly sensitive to their erosive effects. Inflation isn’t as much of a threat at my other publication, Takeover Trader. But make no mistake, it can infect all corners of the market, leaving nowhere to hide.

That’s not to say we have an immediate problem. But with the dovish Federal Reserve keeping short-term rates near zero and running the printing presses at full speed, it’s a matter of when, not if.

Reader Forum: Is Inflation a Major Threat?

To counter the impact of the pandemic and stimulate the economy, the central bank has been purchasing government bonds and other securities on an unprecedented scale, pumping huge amounts of money into the system ($120 billion per month). The M2 money supply (which includes physical notes in circulation, savings accounts, and bank reserves) surged from $15 trillion at the start of 2020 to nearly $20 trillion today.

In percentage terms, we haven’t seen a flood of new money like this since 1943 in the middle of World War II. I’ll be watching this trend closely in the weeks ahead. Once unleashed, inflation is tough to put back in the bottle.

What are specific steps that investors can take now to protect their portfolios from inflation and still profit?

I recommend keeping at least a small portion of your assets denominated in something other than greenbacks (precious metals, for example). Hard assets like land, timber, real estate, and commodities can also be reliable inflation hedges.

Watch This Video: CPI Spikes, Stocks Rise…Go Figure!

Treasury Inflation-Protected Securities (TIPS) are smart inflation hedges, too. While the coupon rate attached to these securities is fixed, the principal is not. The principal is indexed to the consumer price index (CPI) and appreciates in lockstep with inflation. As the principal increases, naturally so do your semi-annual interest payments. And they are backed by the full faith and credit of Uncle Sam.

At maturity, you receive either the original face value of the instrument or the inflation-adjusted principal, whichever is greater. What’s more, income and gains are exempt from state income taxes.

I should point out that these securities will likely underperform traditional bonds during deflationary periods (although that risk seems remote right now). Bottom line, these securities will throw off an income stream designed to at least keep pace with inflation.

If inflation is most corrosive to fixed income assets, then you’ll want to look at securities whose payout streams aren’t set in stone. Companies like Procter & Gamble (NYSE: PG) and Coca-Cola (NYSE: KO) have the pricing power to pass rising costs along to their customers, thereby keeping dividends moving forward.

Editor’s Note: In the above interview, Nathan Slaughter provided valuable investment insights. But my Q&A with Nathan only scratched the surface of his expertise.

In the pandemic era, corporate consolidation is the name of the game. Even the whisper of a “mega-merger” can hand investors enormous returns. As the financial guru behind Takeover Trader, Nathan just pinpointed a potential M&A deal that could dwarf them all. Want to get in on his next big trade? Click here for details.

John Persinos is the editorial director of Investing Daily. You can reach John at: mailbag@investingdaily.com. To subscribe to his video channel, follow this link.