Inflation Investing: Will Historic Patterns Hold?

The current economic environment is an interesting one, and one that I suspect means that historic trends for investing may not hold.  For one, I expect volatility in the markets to persist, which will likely mean that investing will be particularly challenging.  Another reason to question the performance of historically good inflation hedges is valuations.  Let’s get specific on investments that are perceived to be good inflation hedges:

–Growth stocks — especially technology- sectors with above average growth profiles generally perform well during inflationary periods, and technology is the sector that a lot of people are pointing to.  My sense is that select stocks within technology should do well, inventories for many products are depleted and capital spending should eventually rebound.  However, with consumer spending likely to stay muted do to lack of income growth, I see many companies having difficulty achieving sales, especially in consumer electronics.

–Emerging markets– markets outside the US that tend to grow at a faster trend rate than domestic markets.  Although this is a highly volatile area, emerging markets have out-performed developed country markets substantially year-to-date.  With governments globally stimulating economies to prevent a global melt-down, this should mean that emerging markets outperform.

–Commodities like oil — the price of oil had a spectacular rise followed by a sharp fall last year.  When global growth starts showing some life, oil prices should rebound, but I don’t see the speculative excesses of last year returning to the futures market.  It will be interesting to see if drivers, rattled by high gasoline prices last year, will continue to drive less.  Conservation efforts in the US have had a remarkably difficult time maintaining popularity and momentum.

–Gold — gold is almost always touted as an inflation hedge.  But, at current prices, I would question the level of upside available on gold.  Historically, gold was seen as a way to hedge weakness in the US dollar, but now there are other ETFs and currency-linked investments to implement this view more directly. I’m thinking gold underperforms expectations.

see the previous post on Inflation Investing: the Money Illusion
next week a look at inflation and real estate

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