mark ballard

Mark's Investment Blog

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Investing During Inflation (Last In Series)

Where We Are

This has been a rather exhaustive series on which asset types have a historically positive or negative correlation with inflationary periods in our economy.

Here Is What We Learned

  • Broad market investments: over the periods of time examined, the S&P 500 (Large Cap Stocks) and S&P 600 (Small Cap Stocks) were negatively correlated with inflation. This does not bode well for the people who have bought into the theory that investing in an index fund like the S&P 500 is a safe and good choice at all times
  • Value Stocks: over the periods of time examined, the Dow Jones Industrial Average was negatively correlated with inflation
  • Growth Stocks: over the periods of time examined, the NASDAQ was positively correlated with inflation – but we did note that the NASDAQ Index of the 70’s and 80’s is a materially different index than the one we have today, so this positive correlation should be viewed cautiously
  • Gold, Oil & Agricultural Commodities: we saw a positive historic correlation between inflation and these commodities – we did note that the rising price of oil due to supply/demand imbalances is a leading cause of inflation that drives prices higher across the board
  • Fixed Income and Fixed Income Alternatives: as expected, fixed income and its alternatives showed decisively negative correlation with inflation – however, we examined both Treasury Inflation Protected Securities and Floating Rate Loan ETF’s which showed positive correlation but cautioned that the data on the latter is too new and limited to really draw solid conclusions
  • Consumer Staples: given the pricing power that consumer staples companies have used to pass along their increased costs of production to consumers, we were surprised to find that there is a negative historic correlation between their returns and inflation – we noted that could be any number of mitigating factors that keep them from passing along all or even a material amount of their own cost increases, which might be the cause of the negative correlation
  • Financials: again we were surprised to find a negative correlation between the returns on bank stocks and inflation since inflation generally results in rising interest rates which have a positive impact on bank margins and net income – we noted that this may be a case where early in the rising inflation cycle, the rising rates would have a positive impact but that later in the cycle when rates are elevated credit quality issues might come into play and negatively impact net income
  • Health Care: a common perception is that Health Care companies can raise their prices to offset increased costs of production, making them a good investment during times of inflation, and that is exactly what we found with positive correlations between drug, supply and device company returns and inflation
  • Industrials: we found a mixed bag when we examined industrial companies, with some having positive correlations and some having negative correlations – our assumption is that there are industries in the Industrial Sector that have pricing power and others that don’t, and since many of the largest industrials are conglomerates that operate in multiple industries, their correlations are really dependent upon the mix of industries in which they operate
  • Consumer Discretionary: again we found a mixed bag with some companies showing a negative correlation and some a positive correlation – our assumption again that certain companies have competitive advantages that give them pricing power whereas others do not


In the April 30th post titled Prices On The Rise ( I showed you a number of instances where corporations made statements about having to raise prices due to their costs of production increasing. Since then, we had reports of steeply increased consumer and producer inflation with the CPI and PPI reports last week. Also, at the most recent Berkshire Hathaway annual meeting, Warren Buffet noted that his companies were raising prices due to their own costs going up.

Inflation appears to be here and hitting all aspects of the economy, At the present time, the Federal Reserve is stating that the inflation is transitory and will be gone in a few months so they have no intention of tightening monetary policy. We also know that the government is planning on historic levels of fiscal policy spending. The combination of announced easy monetary and fiscal policy to me means inflation will likely not be transitory, but will lead to a permanently higher level of prices.

Before we plateau at that higher level, we will see inflation driving up those prices to that plateau and we need to have investment portfolios structured so that they perform as best as possible.

A winning investment strategy for stock portfolios would appear to be focusing on: (1) blue chips in the health care, energy, agriculture and materials sectors; (2) selectively on companies with pricing power in the industrials, discretionary and financial sector; (3) gold miners; (4) real estate (but not the fixed income alternative REITs); and (5) growth stocks with secular earnings growth fundamentals and perceived dominance for the future.

A defensive strategy for fixed income portfolios would appear to be: (1) a laddered portfolio of bonds and certificates of deposit that will have frequent and sequential maturities that allow for reinvestment at rising rates during an inflationary period; (2) an allocation to Treasury Inflation Protected Securities through a mutual fund or ETF; (3) short duration high quality fixed income mutual funds; and (4) an allocation to variable rate corporate fixed income ETF’s as long as credit quality is maintained.

What’s Next

I mentioned above the concept of prices rising until we plateau at a higher level. I hope to work on a blog post about that in the near future.


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