By David Schassler
Head of Quantitative Investment Solutions
Investors need to think beyond the 60/40 portfolio in periods of high inflation. Historically, real assets have provided diversification to help manage the impact of inflation.
“Statement Shock” Is Setting In
Statement shock is the deeply unsettling feeling that overwhelms investors when they realize that their 60/40 portfolio is down 11% year-to-date. They take a deep breath and realize that, actually, they have been here before. The 60/40 portfolio was down by this much, or more, in the dotcom crash, the global financial crisis (GFC) and the COVID-19 crash.
After further analysis, the investors realize that the problem is likely much worse than they first thought. They are actually down close to 15% year-to-date in real terms, given the high rate of inflation. U.S. inflation, as measured by the Consumer Price Index (“CPI”), is now 8.6% year-over-year and 4.9% year-to-date. The latest inflation report, up 1% month-over-month, was yet another black eye on the face of those that have been calling for “peak inflation” for over a year now. Then, the most concerning aspect of this “correction” sets in. This time actually is different. In those past corrections, the losses were the result of large losses from their 60% exposure to stocks. U.S. equities, as measured by the S&P 500 Index, were down around approximately 40% during the dotcom crash, 50% during the GFC and 30% during the COVID-19 crash. Yet, bond prices were relatively stable and proved to be an excellent hedge. This time, stocks and bonds are down together.
The 60/40 portfolio may not be a good investment solution during a period of high inflation. High inflation erodes corporate profit margins and leads to higher interest rates and overall financial instability. As such, stocks and bonds have historically not performed well during periods of high inflation, which means that investors need to think beyond what has worked during periods of low inflation.
During periods of high inflation, commodities and other real assets have historically provided the much needed diversification. The charts below demonstrate the diversification benefits of commodities during the Great Inflation of the 1970s and the mild bout of inflation in the mid-2000s:
Rolling 3-Month Real Returns During Negative Periods for the S&P 500 Index – December 1969 to December 1979
Rolling 3-Month Real Returns During Negative Periods for the S&P 500 Index – June 2005 to June 2007
History appears to be repeating itself. Stocks and bonds are falling and commodity prices are rising:
Rolling 3-Month Real Returns During Negative Periods for the S&P 500 Index – May 2021 to May 2022
Wake Up and Buy Real Assets!
Commodities are just one way to play high inflation. We strongly prefer a diversified basket of real assets that offers significant inflation protection, with the potential to provide a more stable risk and return profile.
The VanEck Inflation Allocation ETF (RAAX) is materially outperforming stocks and bonds throughout this inflation cycle:
- On a cumulative return basis, RAAX is outperforming the S&P 500 Index by nearly 25% year-to-date, 16.5% over the past one-year and 25% over the past two years (or nearly 10% on an annualized basis).*
- RAAX is outperforming the Bloomberg Barclays U.S. Aggregate Bond Index by 21% year-to-date, 24% over the past one-year and 75% over the past two years.
We have been educating investors on how to invest during high inflation for a long time now. Real assets have, historically, been the top performing asset class during periods of high inflation. Yet, many investors have very little to no exposure.
We had over a decade of abnormally low inflation, low interest rates and slow economic growth. We believe this was a great environment for growth stocks and bonds, but a terrible environment for many real assets. The tables have now turned. We expect real assets to continue to outperform based on our view that inflation will remain elevated for an extended period of time.
Originally published by VanEck on June 15, 2022.
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* For full standardized fund performance, please visit RAAX’s performance webpage.
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