Investments during inflation

This is a good research article on which investments do best in inflationary times.

It’s not clear yet whether we are “living in inflationary times.” It has been a year since the CPI-U rose above the Federal Reserve’s target rate of 2.0%, leading them to smugly claim that inflation would be “transitory.” The bond market’s 5-Year Forward Inflation Expectation Rate is only 2.2%, so bond traders expect that the Fed will be able to control inflation completely within 5 years. This doesn’t answer the question of whether that can be done without a serious bear market and/ or a serious recession…or, indeed, if they are correct in their expectations.

https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=p…

https://fred.stlouisfed.org/series/T5YIFR

Those who believe that inflation will remain high for an extended period may be interested in this article, which addresses stocks and gold as well as bonds. (And some non-standard investments.) This article summarizes a 32-page-long PDF paper, “The Best Strategies for Inflationary Times,” written a year ago by several distinguished authors.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3813202

The data analyzes a large variety of investments over 8 inflationary periods from 1941- 2008.

https://alphaarchitect.com/2022/04/bond-investing-in-inflati…

**Bond Investing in Inflationary Times**
**by Larry Swedroe, Alpha Architect, April 14th, 2022**

**...**

**Treasury inflation-protected securities (TIPS) returns provide the best hedge against inflation, with similar positive real returns in inflationary and noninflationary regimes.**

**Nominal bonds, both investment grade and high yield perform poorly during high inflationary regimes.**

**Despite the conventional wisdom held by many investors that equities provide some protection from inflation (a firm’s debt obligations are inflated away, and product prices may be adjusted), equities tend to suffer from the less stable economic climate (the rate at which future earnings are discounted rises), and costs tend to rise with inflation more than output prices.**
**No individual equity sector, including the energy sector, offers significant protection against high and rising inflation.**

**Commodities provided the best historical performance, averaging double-digit real returns in high inflationary periods. However, in all other periods, the real return averaged just 1 percent annually.**

**Residential real estate underperformed during high inflationary regimes, providing negative real returns.**

**Gold is useless as an inflation hedge.**
**....**
[end quote]

TIPS (Treasury Inflation Protected Securities) are not as good as I-Bonds because TIPS sale price will be lower than par if sold before maturity if bond prices are rising. This will never happen with I-Bonds.

During the period of the study, the market yield of the 10 year TIPS was about 2% (plus inflation). Unfortunately, TIPS market yields fell after 2010, sometimes being negative. Currently, the market yield is around zero so it will only keep up with inflation without additional yield. That might still be better than any other investment if inflation stays high and the bond is held to maturity.

https://fred.stlouisfed.org/series/DFII10

The high-inflation 1970s was almost as bad for stocks as the post-2000 bubble burst.

https://www.multpl.com/shiller-pe

It all depends upon whether the Fed (and the economy itself, complete with supply chain issues) will bring inflation down quickly.

Wendy

8 Likes

It all depends upon whether the Fed (and the economy itself, complete with supply chain issues) will bring inflation down quickly.

Antitrust enforcement would be a much more cost efficient way to battle inflation. Jacking interest rates only punishes those with a need to borrow money and leaves the true culprits unscathed.

intercst

12 Likes

I don’t disagree with you. But this is the world we live in now. We have to invest with current conditions. Fantasizing about potential (but not fully approved) government actions is veering close to politics.

Wendy

4 Likes