Inflation started its spike back in March 2021 when annual inflation rates were at 2% then gradually increasing to 5%, 6%, 7% and then 9% in June 2022. During this time, investment returns across most of the major asset classes have been muted, including some traditional inflation hedges. Let’s take a look at a few of them!
Per the chart below, the performance of US crude oil (USO, the red line on top) has clearly been the top performer over this time horizon with a total return of +55.3%, but at twice the risk of other major asset classes! In fact, over the last three years, oil has generated a negative total return of only -5.3% lagging most major asset classes, so it has not been an “investment for all seasons”. During this most recent environment, however, oil has been the chief culprit in the inflation spike that filters through all aspects of the economy, so we should not be surprised that its price performance has been so high.
Other asset classes considered inflation hedges during this time horizon have not fared as well. For example, conventional wisdom about gold (GLD) as an inflation hedge has not worked out too well with a total return of only +3.1%, underperforming the S&P 500 (IVV) with a return of +4.5% and real estate (VNQ) with a return of +7.8%. On the bond side, U.S. Treasury Inflation-Protected Securities (TIP) have fared poorly as an inflation hedge with a +0.7% return.
At D&A, we prefer a broad-based globally-diversified portfolio management approach that focuses on major asset classes. Consequently, we would almost never invest in oil or gold as an attempt at making a market call on inflation. Our view is that client holdings in U.S. stocks and real estate as an inflation hedge with a complement of short duration bonds will play out over the long term.