Stocks are a hedge against inflation
“I came of age and studied economics in the 1970s and I remember what that terrible time looked like,” US Treasury Secretary Janet Yellen told a House of States subcommittee United in May 2021. “Nobody wants this to happen again.”
Inflation dominated investment conversations in 2021. Many countries have rebounded strongly from the COVID-19 crisis and are experiencing significantly higher inflation than expected. The annual inflation rate in the United States jumped to 5% in May 2021, the highest level since August 2008.
While inflation is a hot topic for investors, since central banks deployed their aggressive monetary policies during the global financial crisis, its importance has grown. Although inflation has been on a downward trend since the 1980s, all this money printing has galvanized the inflation hawks. Some have even warned of potential hyperinflation reminiscent of that seen in the Weimar Republic of the 1920s.
Whether the current higher readings are transient or structural, how can investors hedge against inflation risk? According to a recent survey of quantitative investors at a JP Morgan conference, 47% of respondents believe commodities are the most effective security against inflation, followed by stocks (27%), fixed income products. and Treasury securities protected against inflation (TIPS, 10%), and other instruments (17%).