What stocks fair well during inflation?
This analysis was inspired because I had noticed that bank stocks tended to underperform during times of high inflation, but conventional wisdom was that bank stocks should excel at times of high inflation. So I decided to look at this statistically. I looked around online and shocked that I was not able to find a type of analysis like this! So let’s get into it.
What I did was plot out the monthly inflation rate in the US from 1980 till 2021 and compare it to bank stocks. This itself was a hugely labor intensive process, so I figured, I might as well compare it to all the major ETFs as well, including SPY, USO, DBC, GLD, VNQ, XLF and BRKB.
The correlative results are summarized in the chart below:
And there you have it! But let me explain this chart in simple terms. I will break it down by type.
Bank Stocks & XLF
Interestingly, bank stocks underperform during times of inflation (Stocks included BAC, C and JPM). We see this by the negative Pearson correlation. This means the relationship is inverse. As inflation increases, the value of bank stocks decreases and vice versa.
However, what really is confusing is that XLF, the financial sector index ETF, is completely opposite. It is directly and statistically significantly linked to inflation. As inflation increases, so does XLF. This is extremely confusing, so I looked into XLF’s holdings and they have a sizeable holding in Warren Buffet’s Berkshire Hathaway (BRK.B). In fact, this constitutes the most of their holdings. So I decided to include BRK.B in the analysis and the results are, its inflation neutral. It doesn’t respond to inflation negatively or positively. Is this sufficient to produce the results? Probably not, but I can't be certain. To identify the cause I would have to break down every single holding and compare them all individually to inflation, etc. It would be much too labor intensive.
Oil
I tracked USO here, which tends to follow the energy sector including XOM. We see a clear positive link that is borderline significant. As inflation increases, so does oil (energy). The relationship is borderline statistically significant. It is significant enough to take notice with an R value of 0.327 (indicating a somewhat significant positive relationship).
Commodities
I tracked DBC, the commodities index ETF as the data was readily available to pull. Here, we see a clear inverse relationship. As inflation increases, commodities increase as well. This relationship is statistically significant with a R value of 0.414.
Gold
Conventional wisdom says that gold is a safe heaven for inflation. This analysis shows that Gold is neutral towards inflation. The R value is -0.081. While this does suggest SOMEWHAT of an inverse relationship, its not significant at all.
You may ask, “well, I thought Gold was smart to invest in during times of inflation?” and the answer is YES! And this analysis shows why! Gold is unphased by inflation. Its growth is completely independent of inflation. It will grow regardless of the inflationary climate. This is actually the best investment, one that is not impacted by inflation at all! So whether we are in an inflationary environment or not, Gold is always a smart investment choice because it operates completely independently of inflation.
Real Estate
I tracked VNQ. The results show a positive relationship, meaning as inflation increases, so too does real estate (VNQ). The results are borderline significant. I wouldn’t call this overly significant, but there is an undeniable positive relationship. This also makes logical sense. Inflation tends to favour things that are based in tangible assets (such as real estate and commodities).
SPY / SPX
Interestingly, like gold, SPY and SPX is inflation neutral! I am really shocked by this but not really. I did do a post about inflation and stock market growth a while ago, so I kind of expected this. And because SPY has a variety of stocks, from financial services to energy and tech, I think this actually makes sense.
This means that SPY, like Gold, serves as a solid investment that operates independently of inflation. I think many would like to disagree with this, but its hard for me to disagree with concrete data. But you have to understand that with inflation comes other factors that may have an effect on SPY. But inflation alone does not seem to produce any tangibly significant effect.
Tech Stocks
I tracked QQQ here. Tech stocks are neutral towards inflation as well, with an R value of 0.148. Technically and surprisingly, it’s a positive relationship! Which means, that tech seems to sort of rise when inflation rises. This is extremely interesting; however, I would not call this statistically significant. The relationship isn’t overly strong, but it is admirably stronger than SPY. I am a little surprised by this result. But overall, I would call this neutral. I am still very surprised by this result to be honest.
Conclusion
Based on this analysis, I would say the following actionable information:
- In general, its always good to diversify your investments!
- Gold, Tech, SPY and BRK.B are awesome investments at any time! They all seem to operate independently of inflation and do not seem easily susceptible to high inflation rates.
- If you want dramatic growth during times of high inflation, DBC (commodities), Real estate and Oil/Energy would be the go to.
- Bank stocks are not immune to inflation as conventional wisdom would have one believe.
That’s it!
This post was extremely labor intensive, it required a lot of statistical analysis and a lot of manually inputting data which took a lot of time. I enjoy doing this and I actually learned a lot, but if you like posts like this, feel free to leave a like on this and a comment with your requests and let me know that these types of posts actually interest people!
Thanks for reading and take care! As always, safe trades!
This analysis was inspired because I had noticed that bank stocks tended to underperform during times of high inflation, but conventional wisdom was that bank stocks should excel at times of high inflation. So I decided to look at this statistically. I looked around online and shocked that I was not able to find a type of analysis like this! So let’s get into it.
What I did was plot out the monthly inflation rate in the US from 1980 till 2021 and compare it to bank stocks. This itself was a hugely labor intensive process, so I figured, I might as well compare it to all the major ETFs as well, including SPY, USO, DBC, GLD, VNQ, XLF and BRKB.
The correlative results are summarized in the chart below:
And there you have it! But let me explain this chart in simple terms. I will break it down by type.
Bank Stocks & XLF
Interestingly, bank stocks underperform during times of inflation (Stocks included BAC, C and JPM). We see this by the negative Pearson correlation. This means the relationship is inverse. As inflation increases, the value of bank stocks decreases and vice versa.
However, what really is confusing is that XLF, the financial sector index ETF, is completely opposite. It is directly and statistically significantly linked to inflation. As inflation increases, so does XLF. This is extremely confusing, so I looked into XLF’s holdings and they have a sizeable holding in Warren Buffet’s Berkshire Hathaway (BRK.B). In fact, this constitutes the most of their holdings. So I decided to include BRK.B in the analysis and the results are, its inflation neutral. It doesn’t respond to inflation negatively or positively. Is this sufficient to produce the results? Probably not, but I can't be certain. To identify the cause I would have to break down every single holding and compare them all individually to inflation, etc. It would be much too labor intensive.
Oil
I tracked USO here, which tends to follow the energy sector including XOM. We see a clear positive link that is borderline significant. As inflation increases, so does oil (energy). The relationship is borderline statistically significant. It is significant enough to take notice with an R value of 0.327 (indicating a somewhat significant positive relationship).
Commodities
I tracked DBC, the commodities index ETF as the data was readily available to pull. Here, we see a clear inverse relationship. As inflation increases, commodities increase as well. This relationship is statistically significant with a R value of 0.414.
Gold
Conventional wisdom says that gold is a safe heaven for inflation. This analysis shows that Gold is neutral towards inflation. The R value is -0.081. While this does suggest SOMEWHAT of an inverse relationship, its not significant at all.
You may ask, “well, I thought Gold was smart to invest in during times of inflation?” and the answer is YES! And this analysis shows why! Gold is unphased by inflation. Its growth is completely independent of inflation. It will grow regardless of the inflationary climate. This is actually the best investment, one that is not impacted by inflation at all! So whether we are in an inflationary environment or not, Gold is always a smart investment choice because it operates completely independently of inflation.
Real Estate
I tracked VNQ. The results show a positive relationship, meaning as inflation increases, so too does real estate (VNQ). The results are borderline significant. I wouldn’t call this overly significant, but there is an undeniable positive relationship. This also makes logical sense. Inflation tends to favour things that are based in tangible assets (such as real estate and commodities).
SPY / SPX
Interestingly, like gold, SPY and SPX is inflation neutral! I am really shocked by this but not really. I did do a post about inflation and stock market growth a while ago, so I kind of expected this. And because SPY has a variety of stocks, from financial services to energy and tech, I think this actually makes sense.
This means that SPY, like Gold, serves as a solid investment that operates independently of inflation. I think many would like to disagree with this, but its hard for me to disagree with concrete data. But you have to understand that with inflation comes other factors that may have an effect on SPY. But inflation alone does not seem to produce any tangibly significant effect.
Tech Stocks
I tracked QQQ here. Tech stocks are neutral towards inflation as well, with an R value of 0.148. Technically and surprisingly, it’s a positive relationship! Which means, that tech seems to sort of rise when inflation rises. This is extremely interesting; however, I would not call this statistically significant. The relationship isn’t overly strong, but it is admirably stronger than SPY. I am a little surprised by this result. But overall, I would call this neutral. I am still very surprised by this result to be honest.
Conclusion
Based on this analysis, I would say the following actionable information:
- In general, its always good to diversify your investments!
- Gold, Tech, SPY and BRK.B are awesome investments at any time! They all seem to operate independently of inflation and do not seem easily susceptible to high inflation rates.
- If you want dramatic growth during times of high inflation, DBC (commodities), Real estate and Oil/Energy would be the go to.
- Bank stocks are not immune to inflation as conventional wisdom would have one believe.
That’s it!
This post was extremely labor intensive, it required a lot of statistical analysis and a lot of manually inputting data which took a lot of time. I enjoy doing this and I actually learned a lot, but if you like posts like this, feel free to leave a like on this and a comment with your requests and let me know that these types of posts actually interest people!
Thanks for reading and take care! As always, safe trades!
Comment:
Correction: Commodities is not inverse relationship, its positive! The rest was correct, it should just read "positive relationship".
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