Inflation has been a front-and-center topic in recent\nmonths, mostly because it\u2019s been moving higher. Consumer prices (CPI) rose 5.4% in July 2021 from July 2020, which marked\nthe highest 12-month jump since 2008. <\/p>\n\n\n\n
There was one silver\nlining in the CPI fine print, however \u2013 inflation rose at a 0.5% pace from June\nto July, which marked a material slowdown from the 0.9% increase from May to\nJune. Even still, the average pace of increase was 0.2% from 2000 to 2019, so\ninflation is currently moving twice as fast in 2021 as compared to previous\ndecades.1<\/sup> <\/p>\n\n\n\n It\u2019s still up for debate whether inflation will ultimately\nprove \u201ctransitory\u201d as the Federal Reserve believes, or whether inflation could\nbe stickier. In either case, investors would be well served to understand what\ntypes of investments could serve as effective inflation hedges, and which ones\ndon\u2019t. Here are three factors to consider.<\/p>\n\n\n\n __________________________________________________________________________<\/p>\n\n\n\n What Can You Do When Inflation is Worrying You?<\/a><\/strong><\/p>\n\n\n\n Inflation can be an unsettling topic for many investors. Many questions arise like \u2013 How long will it last? What type of inflation hedges may work in portfolios? Instead of making hasty decisions, I recommend reviewing the fundamentals and hard data.<\/p>\n\n\n\n Get answers to these questions and more with our\njust-released Stock Market Outlook report. This report contains some of our key\nforecasts to consider such as:<\/p>\n\n\n\n If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!\u00a0 __________________________________________________________________________<\/p>\n\n\n\n To understand why quality stocks\nhave historically been good inflation hedges, consider a hypothetical example\ninvolving Coca-Cola. <\/p>\n\n\n\n Let\u2019s say sticky inflation\ndrives up the prices of syrup, cans, and labor, all of which increase the cost\nof producing one can of coke. Rising costs theoretically hurt Coca-Cola\u2019s\nbottom line, unless they raise the price for a can of coke \u2013 which they will. Coca-Cola\nhas pricing power, meaning they can raise the prices of their product without\ndriving away significant numbers of customers. In this way, pricing power gives\ncompanies \u2013 and shareholders \u2013 the ability to maintain profits even as\ninflation goes up. <\/p>\n\n\n\n Investors may also want to\nconsider the distinct possibility that value stocks may hold up better in an\ninflationary environment than growth stocks. The reason why, in my view, has to\ndo with earnings. Growth stocks\u2019 earnings are generally further out in the\nfuture than value stocks\u2019 earnings, meaning the present value of those future\nearnings is more sensitive to higher interest rates (which are often driven\nhigher by inflation). That\u2019s why in the past I\u2019ve warned readers that the\npossibility of rising interest rates in the coming quarters and years are\nlikely to impact high valuation stocks, like Tech shares. <\/p>\n\n\n\n For decades, it has been a popular view that gold is a\nreliable and effective inflation hedge. The data simply doesn\u2019t support it,\nthough.<\/p>\n\n\n\n A recent study by some economists at Duke University looked\nat the ratio of gold to the consumer-price index over long periods. If gold was\na reliably good inflation hedge, the ratio between gold and the CPI should have\nremained relatively steady over the years. It didn\u2019t \u2013 over the past 50 years,\nthe ratio of the price of gold to the CPI has fluctuated from 1.0 to 8.4,\nindicating fairly wild swings and dismissing the notion of \u2018reliable.3<\/sup><\/p>\n\n\n\n The researchers concluded that gold has done a relatively\ngood job of maintaining purchasing power over a time horizon that\u2019s much longer\nthan anyone actually lives \u2013 a century or more. If you consider shorter time\nframes like a few decades, however, gold\u2019s inflation-adjusted price fluctuates\njust as much \u2013 if not more \u2013 than other risk assets. <\/p>\n\n\n\n Then there\u2019s the bottom line, which is long-term total\nreturn. Since 1971, the S&P 500 has generated an annualized return of\n+11.2%, while gold has delivered a significantly lesser +8.2%. If you strip out\nthe decade following President\u2019s Nixon announcement that dollars could be\nconverted to gold at a fixed rate \u2013 which was the decade where gold performed\nthe best \u2013 stocks annualized +12.2% compared to just 3.6% for gold. Even\nTreasuries did better, at +8.2%. <\/p>\n\n\n\n Finally, there are bonds to consider. In an inflationary environment,\nan investor who holds bonds to maturity gets paid back what he\/she lent a\nborrowing government or company, and those dollars are almost certain to have\nless purchasing power five, ten, or 30 years later. What\u2019s more, an\ninflationary environment will produce higher interest rates, and rising rates\nmean falling bond prices \u2013 not great for investors. <\/p>\n\n\n\n This is not to say that bonds are outright bad for\ninflationary environments. It just means that investors need to actively manage\ntheir bond portfolios to ensure their total return and income needs are\nconstantly being addressed.<\/p>\n\n\n\n Bottom Line for\nInvestors <\/strong><\/p>\n\n\n\n It remains unclear how impactful inflation will be in 2021, but it makes sense for investors to think about what type of inflation hedges may work in portfolios. As I\u2019ve detailed above, stocks are not immune to inflationary conditions, but they have historically done the best job \u2013 in my view \u2013 of consistently delivering returns needed to maintain pricing power over time. <\/p>\n\n\n\n
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IT\u2019S FREE.\u00a0Download the Just-Released September 2021 Stock Market Outlook<\/a>2<\/a><\/sup><\/strong><\/p>\n\n\n\n