There are other inflation-resilient options beyond TIPS and commodities, but the performance of other asset classes during inflationary environments has varied widely in the past. The most obvious risk is with cash, which loses value steadily as prices rise. Research has shown that gold can sometimes act as a hedge against inflation, but it can also underperform during periods of rising inflation. Real estate investment trusts (REITs) and other related real estate investments have tended to do better, but their performance is subject to many other factors and there is no guarantee they will do well this time.
A 2009 study by the International Monetary Fund found that over a 12-to-18-month period with inflation shocks commodities were the best-performing asset class, bonds were the worst and equities suffered the most short-term losses that failed to recover over the longer term. However, more recent research from the London Business School found that equities have done well when inflation is within a low-to-mid-single-digit range. The mixed performance of different asset classes during past periods of inflation is a strong argument in favor of diversification this time around.
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The above graph compares the performances of various assets between June 2002 and September 2008. It also compares various assets from November 2015 to the present. Both periods saw rising inflation.
As you can see, crude oil (USO) and gold (IAU) saw jaw-dropping returns between 2002 and 2008, while REITs (VNQ) performed admirably as well. Meanwhile, TIPS (TIP), high-yield bonds (JNK), and the S&P 500 all saw decent returns. Surprisingly, even Treasuries were in the green. On the other hand, investment-grade bonds (LQD) saw slight declines.
Since November 2015, while crude oil, high-yield, and the S&P 500 have seen double-digit gains, TIPS, Treasuries, and investment-grade bonds have underperformed. Gold and REITS have seen mid-single-digit returns.
Gold and oil are good hedges against inflation. While gold usually outperforms in such periods, if inflation rates are rising along with interest rates, it might gain as much. Meanwhile, equities don’t necessarily underperform when inflation is rising. Since inflation usually comes with economic upturns, equities perform admirably—as the above chart shows. Equities only underperform when inflation runs very high.
As we discussed earlier in this series, high-yield bonds are actually a good option when inflation rates rise.