mark ballard

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Investing During Inflation (Part Three)

So Far

In the first post in this series, we took a look at how Large Cap and Small Cap stocks (as represented by the S&P 500 Index and the S&P 600 Index) performed during inflationary periods. We observed that there is a definitive negative correlation between inflation and both Large and Small Cap stocks.

In the second post in this series, we took a look at how Value and Growth stocks (as represented by the Dow Jones Industrial Average and the NASDAQ) performed during inflationary periods. We observed a negative correlation between inflation and Value stocks, but a somewhat positive relationship between inflation and Growth stocks.

Today, we are going to look at commodities to see how they perform during inflation.


Intuitively and based upon anecdotal observation of the past, gold seems to perform well during times of inflation. So lets look at the actual data:

As the anecdotal observations pointed out, Gold has a positive correlation with inflation.


When we think of inflation as a consumer, one of the key things we go to is the price of gasoline at the pump. As such, we assume that there will be a positive correlation between the price of oil and inflation.

This graph looks a bit wonky given that 200+% return on the price of oil at the 12+% inflation level, but putting it in historic context this we a result of the Arab Oil Embargo in the early 70’s. To get a possibly more accurate look at the correlation between oil and inflation, the graph below excludes 1974 from the data, so both the oil price increase and the inflation level are not shown in this graph:

The graph looks less skewed with the exclusion of 1974, but you can see a material positive correlation between Oil and inflation. What is beyond this blog post is whether the change in the price of oil is a cause or a result of inflation – maybe I’ll get ambitious and do that research when time permits – but we see a positive correlation and that is the purpose of this exercise.


One of the strange things I find in government reports is that the Core CPI, the number that the government wants us to focus on excludes the inflation of food and energy, two of the primary things that impact consumers. The graph above on Oil shows you the very positive correlation between energy and inflation, so lets take a look at food:

Not much of a surprise, we see a positive correlation between the price change of Corn and inflation.


Is this an isolated thing and not reflective of other agricultural products? Lets look at soybeans.

The correlation is less dramatic than corn, but there is still a positive correlation between the percent price change of Soybeans and inflation.


Commodities appear to have a positive correlation with inflation while the broad stock indices and the Value stock investing style have a negative correlation. At some point, when the artificial impact that government economic policies based upon Modern Monetary Theory and Modern Fiscal Theory wane, we will likely see these historic correlations return.

Market-beating portfolio returns will depend upon alpha and not beta, as discussed in Part One of this series. However, the time to prepare for that is now, not when the monetary and fiscal stimulus ends or is perceived by the market to be inevitable. By then, it is too late and the impacts will have been felt.

We are already seeing the impact of inflation on commodities, with prices for gold, energy and food up materially year-over-year. The question we need to ask is whether this inflation is transitory as the Federal Reserve states, meaning that once the stimulus is removed then inflation will fall back to pre-stimulus levels, or will it have embedded itself into the fabric of the economy and actual monetary tightening will be required to end it. At this point, given that the Modern Monetary and Fiscal Theories are a new thing and that we are swimming in unprecedented waters, I can’t really answer that. However, it is something that we will discuss in a future blog post as there could be other secular factors at work beyond government policy that will impact energy in coming years.

Up Next

We have looked at the commodities themselves, but most people cannot invest directly in commodities (except through ETFs and mutual funds, which is how we have to do it). So, we will take a look to see if the positive correlations shown above also are shown to exist with the commodity companies that mine, grow, process, sell, and transport those commodities so they get into the hands of producers and consumers.


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