How To Play It. Rising inflation would deteriorate asset value over the long-term for bondholders, and a way to combat this is through Treasury Inflation-Protected Securites (TIPS). Another way to hedge against inflation is through commodities, gold being a classic inflation hedge.

  • SPDR Barclays Capital TIPS (IPE): up 4.3% year-to-date
  • iShares COMEX Gold Trust (IAU): up 4.3% year-to-date

Deflation. A deleterious cycle can be created as banks stop lending, businesses halt expansions, wages fall, people reduce spending and prices would be driven further downward. The CPI is a good indicator for deflation.

How to Play It. Investors should look to short-term investment strategies, such as short-term certificates of deposit or money-market funds. But those with a 10-year time table could look into the technology sector since companies that seek to boost productivity will do so through technology.

  • PowerShares QQQ (QQQQ): up 15.3% year-to-date
  • PowerShares Dynamic Semiconductors (PSI): up 8.3% year-to-date

Stagflation. Stagflation is market by high inflation and slow economic growth. Lenders, households and businesses would be pessimistic about the markets, meaning that growth would come to a crawl. Shortage of production capacity will cause a rise in inflation. The misery index, a combination of unemployment and inflation rates, gauges the rate of stagflation.

How to Play It. Protecting your portfolio from stagflation is a real challenge. If stagflation is coming, investors may look into high-quality growth stocks (or in the case of ETFs, such funds that hold high-quality growth). Gold and/or TIPs can help ease some of the risk on the inflation side, as well.

  • RevenueShares Navallier Overall A-100 (RWV): up 5.3% since inception (note that this fund is a blend)
  • SPDR Dow Jones Large Cap Growth (ELG): up 6.8% year-to-date

For full disclosure, some of Tom Lydon’s clients own shares of QQQQ.

Max Chen contributed to this article.

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