The US dollar and large-cap stocks have provided a better hedge as compared to gold during this inflation cycle. Emerging market stocks and bonds have been a disaster, as expected.
Since March 2021, when the MoM CPI broke above 2%, the CPI has risen about 16.2%, as shown in the relative performance chart below (red line).
The US dollar index (UUP) has gained 19.7% in the same period, providing a robust hedge against inflation. Large-cap stocks (SPY) have gained 14.2% as compared to 11.3% for gold (GLD).
Emerging market stocks (EEM) have plunged 24.8%, and bonds (TLT) have cratered 32.4%.
Crude oil has rocketed 93.4%, and agricultural commodities (DBA) have surged 50%.
Large-cap stocks can serve as a hedge during high inflation periods, but that depends on the market regime. For example, from 1978 to 1981, with inflation as high as 15% in March 1980, the S&P 500 rose about 60% from February 1978 to November 1980.
A portfolio with allocations to the US dollar index, large caps, commodities, and gold could offer inflation protection, but performance depends on the timing. Trend-following attempts to accomplish this with timing have been successful during high inflation periods but have widely underperformed during low inflation periods (see “Lost Decade“).
The performance of potential hedges depends on market regimes and inflation drivers; there are no general rules investors can follow other than the fact that they should do something to protect their wealth. It is a challenge to find an experienced financial adviser who is not biased toward certain investment styles and is flexible enough to deal with the current regime.
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Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data