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History offers insight as to how market dynamics can shift during periods of high inflation. Read my latest Markets in a Minute for a look at which sectors shined during the Great Inflation and other lessons that may help investors navigate today’s inflationary environment.
Markets in a Minute: Investing in an Inflationary Environment
Equity prices reached new highs in 2021 and, unfortunately, so did inflation. One question that now looms large is whether we’re entering a prolonged period of high inflation. And, if so, what can investors do to mitigate risk?
Historically, the stock-market sectors that have tended to shine during periods of high inflation focus on the goods and services people need, as opposed to what they want:
High inflation doesn’t necessarily mean stocks overall will underperform. Research shows that markets can still enjoy broad gains when inflation is elevated:
***CPI Rise is the increase in the Y/Y growth rate, trough to peak, in basis points.
Green shade means sector has outperformed the S&P 500 while red has underperformed. Real Estate excluded due to lack of history. Source S&P Dow Jones Indices.
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index.
Source: NDR with data from S&P Dow Jones Indices. Index proxy: S&P 500 from June 30, 1972 to January 31, 2021.
What factors have fueled the current bout of inflation, which saw the CPI climb by 7% year over year in December? The answer offers clues as to what it will take for inflation to cool:
We believe inflation should begin to cool later this year as supply chain disruptions ease; the Omicron wave subsides and consumers begin spending more on dining out, travel and other services; and the Fed raises rates, which should slow housing-price increases. Of course, much of this depends on how the pandemic plays out.
In the meantime, inflation remains a headwind. While certain assets (like energy and Treasury Inflation Protected Securities) can help investors hedge against inflation, their collective track record outside of inflationary environments is mixed. That’s why it’s important for investors to regularly revisit their exposure to such assets and maintain a diversified portfolio.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Private Wealth Services, LLC, Kestra Investment Services, LLC, Kestra Investment Management, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Private Wealth Services, LLC, Kestra Investment Services, LLC, Kestra Investment Management, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC does not offer tax or legal advice.