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4 Reasons Why Stocks Are Your Best Hedge For Inflation

Mar. 02, 2018 10:33 AM ETXTH, SOXX, IGV, QQQ5 Comments
CrowdThnk profile picture


  • Inflation is a top concern for market investors and signs are clear that inflation is trending higher with tight labor markets and an economy running at capacity.
  • While looking for inflation protection, investors should look no further than stocks, especially those that provide flexible margin power to raise prices and pass of higher input costs to consumers.
  • Other traditional inflation hedges - gold, oil, TIPS and real estate - all have their pros and cons, but don't compare to the qualities of equities.

"Inflation is a way to take people's wealth from them without having to openly raise taxes. Inflation is the most universal tax of all." - Thomas Sowell, economist

Inflation is at the top of mind for most investors these days. While there are many contributing factors that led to the recent market sell-off, most analysts point to the unexpectedly high US wage data released on Friday, Feb. 2, as a primary culprit. To be sure, the reasons to be concerned about inflation run aplenty: a full labor market operating at capacity, rising wage pressures, accelerating growth driven by the fourth industrial revolution, tax cuts resulting from large-scale fiscal stimulus measures, buoyant consumer confidence, and so on. A majority of market participants cite inflation as their primary market concern from a survey of market respondents. But how can investors protect themselves from the impending "inflation dragon"? Equities provide investors a unique and historically robust way to hedge their inflation exposure.

NFIB Compensation PlansNational Federation of Independent Business Compensation Plans. Source: Bloomberg.

Does Wage Inflation Lead to Price Inflation?

Wages and labor input costs is a particular dataset that has caused a ruckus among market participants and drawn a lot of fanfare. Without a doubt, most have their eye on this dataset every first Friday of the month, almost supplanting the Non-Farm Payrolls as the preeminent economic figure. However, do wages actually lead price inflation or vice versa? There's a lot of debate on this topic, but empirical research from both the San Francisco Fed and the Cleveland Fed both suggest that wages do not contain much useful information for forecasting price inflation that is not available from other inflation indicators.

In fact, the Cleveland Fed study found that there's little empirical evidence to support the view that higher wages cause higher prices. But the relationship

This article was written by

CrowdThnk profile picture
Hans Kullberg, Co-Founder and CEO of CrowdThnk (www.crowdthnk.com). CrowdThnk measures & quantifies stock market consensus positioning to provide clients with data-driven insights and actionable analytics. Using Crowdsourced data and Big Data Analytics, we aggregate & assess consensus market positioning and use Machine Learning to forecast future market direction for over 500 stocks. Our process is built to help investors achieve a market edge and boost investment performance by Harnessing the Wisdom of Crowds.

Analyst’s Disclosure: I am/we are long QQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (5)

Dale Roberts profile picture

Stock markets don't work. But certain types of stocks can be layered in.

And perhaps they need to be separated from the index mix so that you can actually use them. aka rebalance or spend.

Great article. Sorry, I am so late in reading your article but I found it during a Google search for: Are stocks inflation hedges.

I have a question about TIPS. If your objective to to provide your portfolio with an inflation hedge, why would you buy TIPS having long maturities? Won't the bond decline in price with yield curve steepening? I think TIPS with short maturities would be more appropriate. I think CPI doesn't reflect consumer prices in the least.
Hi, thanks for the introduction to inflation equity dynamics.

I don't think an overly inflation focused strategy is a good approach at this particular time. Using inflation as the main criteria for justifying a heavy allocation to equities can be a problem. The past 9 years of extensive QE has put the corporate balance sheet in a rather odd position. Very very debt heavy, and the debt was financed at very very low interest rates. It's been used for massive share repurchasing.

Both nominal and real interest rates will be going up with QT. The income statement dynamics of corporations in this new environment will be affected significantly. A lot of the cheap debt from the past 9 years has accumulated to very high levels and it will be refinanced at relatively much higher interest rates (given that interest rates have been so low the last 9 years). Relative is the key point here. An increase from 2.0 to 3.5 is a massive increase percentage wise. Accordingly,, margins will be significantly impacted. In addition, Companies will no longer have access to cheap debt to repurchase shares on the massive levels that we have seen in the last 9 years.

With both real and nominal interest rates increasing significantly relative to the QE era, the profitability and income growth that we've been so accustomed to during the last 9 years will deteriorate and slow from an income statement dynamic perspective . Repurchasing will slow and relative float will increase. Real interest rate changes (increases) will directly affect the discounting of the expected earnings over the next 10 years resulting in lower real valuations.

This perspective offers one of many additional market dynamics that one must consider when evaluating equity valuations moving forward. Overly focusing on inflationary pressure and revenue dynamics is an incomplete analysis.

By the way, I have nothing against equities. I own plenty and will continue to own them. However, you need a very long time horizon (decades) to ensure that they pay off as a wealth builder. The equity bear market during the 70's made many a real estate millionaire. And, the lesson we learned, if you isolate that inflationary period, is that equities were not the best hedge against inflation. Equities, along with bonds proved to be the worst!!!!! Those that did well were in hard assets and later, those that invested in equities after inflation was tamed. Will history repeat? No one knows for sure, but, if history is any guide, high inflation and bull markets are very bad bedfellows. FACT.

Apparently you don't remember the 1970's - the last time we had a very serious inflation problem in the United States. At age 66 I remember the inflationary period of the 70's very well and real estate did great - especially housing. Unfortunately, equities / the stock market DID NOT. In Jan. 1973 (about the time inflation really took off) the SP 500 was at 675. By July of 1982 it was at 272!!!!!! So much for your thesis. Mr. Volker of course solved the problem but it took a while for equities to rebound after a decade of an inflation driven bear market. Please, do your research. I'm sticking with hard assets - starting with real estate.
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