Inflation Nation
All Americans are feeling the pinch
Inflation is hitting a high...
...not seen in for decades...
...and casting a dark cloud...
...over the economic horizon
And if the rate of inflation...
...outstrips the return on investment...
...then investors are effectively losing money
Knowing what to invest in...
...during such turbulent times...
...is particularly challenging
So we've looked at 18 years of market data...
...from stocks and bonds...
...to gold and oil...
...to see which investments...
...tend to perform best during high inflation
In this film, we've analysed data...
...from eight periods of high inflation...
...which we're defining as any time...
...the US rate of inflation climbed above 5%
Which has been the case in the US...
...UK and many European countries...
...since late 2021
Of course no data provides...
...a guarantee of how assets will perform in the future
But one thing is for sure...
...as an investor...
...if you ignore the past, you're history
Here at Capital.com...
...we don't only provide a platform...
...for trading and building a portfolio
We also explain the market...
so you can become a confident investor
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...and make sure your notifications are turned on
We produced a previous explainer...
...on inflation in late 2021
During that time...
...the US rate was hovering...
...between 3 and 4% and in that video...
...we explain the causes of inflation...
...and how it moves through the economy
Inflation is on the rise
You could describe it as panic
To check that video out...
...click the link on screen now
But for now...
...with double digit inflation present in many countries...
...we're going to analyse some time tested strategies...
...you could use while investing
Soviet controlled Hungary, 1946...
...monthly inflation reached an astonishing...
...41.9 quadrillion percent
That's the highest level in history
Extremities aside...
...a little bit of inflation is normal...
...most central banks have a target of 2%
If it gets much higher than that...
...central banks raise interest rates to bring it down
We've actually done a video on that recently...
...which you can watch...
...by clicking the link on screen
But raising interest rates doesn't always work
Central banks have been using this lever...
...for the last year...
...and yet many countries are experiencing...
...or heading towards double digit inflation
Let's take a look at how different...
...asset classes have performed...
...during periods of high inflation
Periods of soaring inflation are often triggered...
...by rising energy prices
Typically, that's when there is a global shock affecting...
...the supply of energy goods
Like the oil crisis in the '70s
People can no longer afford to run cars...
...that do 12 miles to the gallon...
...the energy crisis is killing them
And the current Russian Ukraine war
Europe's energy crisis is deepening...
...hours after G7 leaders agreed to implement...
...a price cap on Russian oil
Historically, high inflation rates are associated...
...with better performance of energy commodities
During the last eight periods of high inflation...
...since 1941...
...Energy commodities delivered average real returns...
...that is net of inflation of over 40%
They were found to be the best performer...
...in a study of 17 asset classes by Duke University
And during the end of the Reagan...
...and start of the Bush Senior years...
...energy commodities offered real returns...
...of just over 200%
In this most recent inflationary period...
...from June 2021 to August 2022...
...the real returns on Brent Crude are 16%...
...and 11% for West Texas Intermediate
So let's take a look at the relationship...
...between returns for crude oil and inflation...
...over the past half century
The dots on this chart...
...show the rates of inflation...
...versus returns for crude oil
As you can see...
...as the rate of inflation increases...
...so do the returns
During the same period...
...returns for natural gas...
...showed a similar pattern...
...to rising inflation
And in the past year alone...
...natural gas offered a staggering 137% return...
...largely due to the supply issue...
...stemming from the war in Ukraine
The wealthy speculate with gold articles...
...and gold bars when the price of gold is right
Gold has long been considered...
...a hedge against inflation
As real physical asset...
...it can serve as an alternative currency...
...when a country's money failed
But that image is...
...a bit misleading
Gold isn't actually a good inflation hedge...
...for all levels of inflation
It's not until you get into double digits...
...and particularly above 12.5%...
...which is a red flag for many investors...
...that gold investments really do have the Midas touch...
...and they can act as a glittering hedge...
...against the loss of purchasing power...
...in fiat currencies and bonds
For example...
...average real returns for gold were...
...13% over the last eight periods of high inflation
But we see that gold returns skyrocketed...
...after the end of Bretton Woods in 1971...
...when President Nixon separated the link...
...between the US dollar and the precious metal
In December 1974...
...when inflation was almost 12.5%...
...real returns for gold were nearly 170%
And gold offered returns of more than 150%...
...during the late seventies...
...when inflation almost topped 15%
But now things have changed
During this period of high inflation...
...because it hasn't conclusively broken...
...the magic double digit mark...
...real returns are at -12.3%
And with the Fed being hawkish over hiking interest rates...
...the dollar is more attractive...
...than gold for many investors
And talking about the buck
While inflation has recently been rising...
...at the fastest pace since the 1980s...
...the US dollar has simultaneously grown...
...to a 20 year high
In this current inflationary period...
...dollar returns are over 9%
It seems like it should be...
...a massive economic contradiction...
...doesn't it?
Well, the picture's complicated
The Fed's aggressive tactics...
...compared to other central banks...
...have made the US an attractive place for capital
And also...
...because energy commodities are set in dollars...
...rising oil and gas prices provide the greenback...
...an edge against other currencies
But data actually shows...
...the dollar has historically...
...been a very poor inflation hedge
Despite its role as the world's global reserve currency...
...average real returns for the buck were negative...
...during the last four periods of high inflation
So we can in fact say...
...that the US dollar is currently outperforming...
...because other factors have come into play
Bonds are often considered a safer investment than stocks...
...offering less volatility...
...and steady returns over a longer period
Some might even say they are boring
And during inflation...
...fixed rate longer term bonds are especially unappealing
So why is that?
Well, if inflation reaches rates...
...above that of a bond's rate of return...
...then you are essentially stuck losing money
Let's take a look at inflation versus returns...
...since the end of the '90s
Bonds really didn't do very well
Unlike energy commodities and gold...
...returns for US Treasury bonds drop as inflation soars
This is also the case...
...during the current phase of high inflation...
...where real returns have sunk to -25%...
...for US Treasury bond futures
Theoretically...
...Treasury Inflation-Protected Security Bonds...
...or TIPS for short...
...perform better during the initial stages of inflation
But even they haven't been able to provide...
...real positive returns...
...as rising yields have depress their value
Higher inflation by itself...
...isn't necessarily bad for stock prices
That is because higher prices can boost...
...corporate profits...
...especially if companies are able to pass on...
...higher input costs to their customers...
...via price hikes
The energy sector is possibly...
...the most obvious example of this
So it all depends on...
...which stocks you're investing in
Defensive stocks...
...which are staples that people will always...
...buy regardless of costs...
...tend to weather high inflation
Health care performed well historically...
...second only to energy...
...with average real returns of just below zero
All other sectors that we looked at...
offered a negative average rate return...
of 6% or more...
...during the last eight periods of high inflation to 2008
Consumer durables stand out as a key underperformer
And that's because when high inflation...
...shrinks our real purchasing power...
...we stop spending money on...
...consumer durables like electronic goods
That's why cyclical stocks...
...ones affected by macroeconomic events...
...suffer during high inflation
Let's take the last year...
...of increasingly high inflation
Energy continues to be the best performing US sector
Energy stocks increased on average...
...30% in real terms between June 2021...
...and September 2022
You'll notice utilities have also beaten inflation...
...by rising 5% in real terms...
...but the current energy crisis...
...will surely have a role to play in this
One final point...
...say some value stocks have generally outperformed...
...more glamorous growth stocks...
...during times of high inflation...
...as they have the cashflow...
...to weather the storm
I hope you enjoyed this film and found it...
...useful for investing during times of high inflation
It's worth mentioning...
...that no period of inflation is the same...
...and they have their own unique drivers
Don't forget to like this video...
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...and of course watch our other videos on Capital.com...
...to get more crucial trading and investment tips