Earlier this year, when it became clear that high inflation would not be temporary (at least as temporary as many pundits and the government suspected), we wrote about the subject. What might be causing this burst of inflation. What we can do in our own financial lives to prepare. And what investments have historically done well (or at least less badly) during inflationary times. On that last point, let’s check back in to see what has happened so far in this inflationary period.
The Recent Performance of the Promising Inflation Hedges
As we discussed in our article “Inflation Hedges for Impact Investors”, traditional assets like stocks or bonds tend to deliver very weak inflation-adjusted returns when inflation is high. But researchers from Duke University and the Man Group identified several asset classes that have actually benefitted from high inflation in the past. What’s happened since August 2021 (when inflation first rose above 5% year over year, our definition of “high”) fits closely with their findings. Look at the table below:
Except for Short-Term TIPS (Treasury Inflation-Protected Securities) and Bitcoin, which we added to the list, the remainder of the asset classes or strategies shown are those evaluated in the aforementioned Man Group study. The inflation-adjusted returns in this current episode of inflation closely fit how the Man Group ranked their historical performance and calculated their past success rate as a hedge (which they called “Hit Rate”).
Trend-Following Strategies: These strategies are sophisticated hedge-fund-like strategies that bet on price trends (up or down). Historically, they’ve been the best performers during high-inflation periods. They’ve certainly done well so far this time. But trend-following strategies are probably the least well-known of the investments listed. Hesperian has the expertise and access necessary to evaluate the funds in this space on your behalf.
Commodity Futures: Commodities were the second-highest performer in the Man Group study. They’ve also done well since inflation accelerated recently.
Gold: We labeled gold a “maybe” as it can be a strange animal, which we won’t get into here. This time has been no different. Even though gold is commonly associated with inflation, it has not matched or beat inflation yet this time.
TIPS: TIPS may have “inflation-protected” right in the name, but they’ve only been relatively better than other bond investments because they face the same risk from rising interest rates as regular Treasury bonds do.
Short-Term TIPS: We added in Short-Term TIPS, another asset we consider that has historically exhibited higher sensitivity to inflation than longer-term TIPS.2 They’ve done better than most every other bond investment category due to their lower interest rate risk, but they also haven’t kept up with inflation.
Energy Stocks: While they’ve been the best performer so far in this inflationary cycle, historically they’ve only managed a positive inflation-adjusted return of 1% on average, adding little versus investing in commodities directly. The high return we post obscures the very high volatility you would have had to stomach owning these over just the past year, not to mention they’re a nonstarter for impact-minded investors who don’t want to support fossil fuel industries.
All the “traditional” asset classes (bonds and stocks) have performed poorly in inflation-adjusted terms, as expected. And so much for Bitcoin being a great inflation hedge as some promoters have claimed. Crypto has been the worst performer of all!
The Value of Studying the Past
Our experience over the last 12 months gives us even greater confidence in our study of historical experience. We believe if you can find a close analog period in the past, you can better navigate the present and future. Famous hedge fund manager Ray Dalio calls this identifying “another one of those”. All the cliché aphorisms apply: History doesn’t repeat but it does rhyme. Those who do not remember the past are condemned to repeat it. And so on. We insist inflation has predictable consequences for markets and economies. To us, this recent inflationary period confirms that. And inflation can beget more inflation, which is the big risk today.
Is your portfolio prepared? Very few investors have exposure to any of the investments with a historical track record of benefitting from inflation. And for the few that do, they tend to hold these investments whether inflation is high or not, even when their advisors should know some inflation hedges can perform quite poorly unless we’re in a high-inflation episode. That doesn’t make sense to us either. Talk to us to learn more about how we can build you a portfolio we think will be more resilient to the threat of inflation.
Eric R. Figueroa, CFP®
I am a Folsom, CA, fee-only wealth manager serving the Greater Sacramento area, California Gold Country, and the nation virtually. I offer financial planning and investment management, specializing in impact investing and personalized values-based investing.
All content presented in this article is for informational purposes only. Materials presented should not be interpreted as a solicitation or offer to buy or sell a security or the rendering of personalized investment advice, which can only be provided through one-on-one communication with a financial advisor. The content reflects the opinions of Hesperian Wealth LLC (HW), except where cited, which are subject to change at any time without notice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All information or ideas provided should be discussed in detail with a financial, tax, or legal advisor prior to implementation.
Any reference to a market index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indexes are unmanaged vehicles that do not account for the deduction of fees and expenses generally associated with investable products.
Investing involves substantial risk, including the potential loss of principal. HW makes no guarantee of financial performance nor any promise of any results that may be obtained from relying on the information presented. HW may analyze past performance, but past performance may not be indicative of future performance.
1 Trend-Following Strategies’ performance is represented by the SG Trend Index, which you cannot invest in directly. All other asset classes are represented by investable funds we think best approximate the return records assessed by the Man Group study: Commodity Futures by the iPath Bloomberg Commodity Total Return ETN (DJP), Gold by the abrdn Physical Gold Shares ETF (SGOL), Short-Term TIPS by the iShares 0-5 Year TIPS Bond ETF (STIP), TIPS by the iShares TIPS Bond ETF (TIP), Energy Stocks by The Energy Select Sector SPDR® Fund (XLE), 2-Year Treasury Bonds by the Vanguard Short-Term Treasury ETF (VGSH), 10-Year Treasury Bonds by the iShares 7-10 Year Treasury Bond ETF (IEF), Below-Investment-Grade Bonds by the SPDR® Bloomberg High Yield Bond ETF (JNK), US Stocks by the Vanguard 500 ETF (VOO), Investment-Grade Bonds by the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), and Bitcoin’s spot price.
2 Source: “The Long and Short of TIPS”, June 2017, Vanguard.