Monday, April 11, 2011

Do Stocks Offer an Inflation Hedge?


I posted a couple of pieces last week about dividend-paying stocks vs. longer maturity bonds.

One argument in favor of stocks over bonds is that they offer at least some protection against inflation, at least in theory.

If you believe that inflationary pressures are about to explode to the upside - which Random Glenings does not, by the way - it seems logical that you should be favoring dividend-paying stocks.

Yesterday's New York Times carried a good column authored by Paul Lim which discusses how much inflation protection stocks could offer investors.

As it turns out, as Mr. Lim writes, the degree to which stocks offer inflation protection is partly dependent on just how high inflation rates go:

...Ned Davis Research, based in Venice, Fla., recently analyzed how the market performed in different inflationary environments over the past four decades. While the Standard & Poor’s 500-stock index posted double-digit gains, on average, when inflation has been between 1 percent and 4 percent, stocks fell at an annualized rate of 1.4 percent when inflation jumped to between 4 percent and 9 percent.

What’s more, in periods when the inflation rate is accelerating, not all types of stocks perform the same way. Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research, looked at periods since 1970 when the year-over-year change in the Consumer Price Index was accelerating. He found eight such sustained periods, and saw that half of the 10 market sectors, on average, gained ground during those times; the others declined or were flat.


Stocks That Can Do Well Even if Inflation Rises - NYTimes.com