What is the best hedge against inflation when the stock markets are crashing? For a long-time stocks have been a good bet. Many investors are now selling their shares and this is causing stock prices to crash.
The S&P recently dipped into bear market territory, having fallen by 20% from its recent high. It joins the Nasdaq which has also fallen by 29% earlier in the year. The fear and eventuality of a recession will only drive this downward trend.
If the history of bear markets are anything to go by, this losses might not recover any time soon. The average bear can take 13 months to go from peak to trough. In many instances this has been much longer. The depth of the market crash can also be far worse. With some bear markets causing crashes of 40%.
Is this the time to sell off your stocks too? What is the best hedge against inflation if not stocks? What should an investor do as inflation rises and stocks fall?
Disclaimer: This is not financial advice and your are responsible for your own financial decisions. When investing capital is at risk. Please note: this article may also contain affiliate links.
The Unique Economic Background Of The Crash
Inflation and the cost of living crisis are asking tough questions of investors. You might be asking what’s the best way to hedge against inflation? Worse, what is the best way to hedge against stagflation?
The truth is that we are in uncharted territory. There is not a parallel economic time that we can compare to. Having recently read Nouriel Roubini’s Crisis Economics many of concerns around the state of the economy are arising all at once. The theories and predictions surrounding economic pressures all coinciding at once. This includes but are not limited to:
Global Debt has reached a point not seen since the end of WW2. The years surrounding the 07/08 financial crisis are nothing compared to now.
Interest rate must rise from their all-time-lows. This rises may cause this debt bubble to crash or the economy to stagnate. As a result, policy makers will wimp out on bold interest rate rises.
Inflation is at its highest levels since the 90s contributing to a cost of living crisis. This will likely continue as rates remain below what is required to kill-off inflation.
There is a cost of living crisis driven by rising energy costs and global supply chain shortages.
There is also the tidal wave of economic stimulus swirling around the economy. Printing money to fund Covid-19 furlough schemes was always going to have repercussions. The alternative possible outcome was mass unemployment and an economic depression.
Central currency concerns: Including potential devaluation and debasement of the dollar. Emergence of new global currency. Although it’s unclear what this would be. The Chinese will not want Yen to increase too much or become main currency. Cryptocurrency is too young and not tied to the economy.
Gold detached from the value of the dollar in the 70s. As such it’s not a secure store of value people think it is. It fluctuates as much as any other asset class. As a result, investors are not sure where to invest.
What Is The Impact On Global Assets?
The economy may suffer both a lack of growth, combined inflation eating away at profits. This means that equities may underperform against inflation.
Since the 70s we’ve entered a new era of global economics where Gold is detached from the dollar. Traditional hedges may not work.
Fixed income assets such as TIPS may underperform. This would happen if the government raises interest rates, after issuing bonds.
Real estate is a traditional hedge but rents and homes reaching a peak unsustainable level.
We have already seen huge stock price declines for some of the leading companies. Even Amazon has seen a 10% decline. Technology stocks have been hit even harder.
What Is The Impact On Global Assets?
The economy may suffer both a lack of growth, combined inflation eating away at profits. This means that equities may underperform against inflation.
Since the 70s we’ve entered a new era of global economics where Gold is detached from the dollar. Traditional hedges may not work.
Fixed income assets such as TIPS may underperform. This would happen if the government raises interest rates, after issuing bonds.
Real estate is a traditional hedge but rents and homes reaching a peak unsustainable level.
We have already seen huge stock price declines for some of the leading companies. Even Amazon has seen a 10% decline. Technology stocks have been hit even harder with the likes of Netflix falling 70%.
Productivity & Innovation?
In comparison to the end of the world war – global innovation is also insanely high. There are also a number of infrastructure projects in response to climate change and the Ukraine-Russia War (i.e. the detachment from Russian Gas & Oil.
There are also worker shortages in a number of crucial economic areas, which means there are problems to be solved! Which means that there are continuous breakthroughs in technology:
Climate Change = Mass infrastructure changes and investment in sciences. Solar and wind farms, hydrogen, Fusion Technology
Driver shortage = Driverless and automated trucking.
Cargo shipping delays & highly pollutive ships: Electric autonomous vehicles.
Worker shortage = Artificial intelligence, Robots and automation. For example, UiPath are using robots to automate company’s business processes.
Housing crisis + raw materials are in short supply and expensive = 3d printing, graphene use. Graphene is 200x stronger and 6x lighter than steel. It’s two-dimensional nature means it can be used in very unique ways.
Congestion = EVTOL production, infrastructure and vertiports. Check out Joby Aviation and Lilium.
Overwhelmed healthcare systems and new viruses = mRNA vaccines for viruses such as Covid-19. Gene based treatments are also in the works from the likes of Crisper Therapeutics.
Worker shortage in retail and disruption of cost base = Digitation of products e.g. Metaverse.
The economy can stagnate when there is a lack or productivity of innovation. By contrast, the economy has never had to innovate so fast. This means growth must be forced into all areas of the economy. This means investment in infostructure, science and technology.
Hedging Our Investments On Growth
Hedging your bets in favour of growth may be the solution. Innovating our way out of the cost of living crisis may be the only way forward.
Consider the airport security fiascos in the UK due to labour shortages. If they cannot find the people to recruit they must use technology. Companies such as Evolv Technologies are using artificial intelligence scanners to combine the traditional methods of security. This means they can process 100x the number of people in a fraction of the time, with great accuracy. This means better customer experience and a safer environment.
Global supply chain shortages arise due to a driver shortage and cargo vessels. TuSimple are creating driverless trucks which may solve this issue. There’s even a Norwegian autonomous electric cargo container ship.
Second to this, these companies will need the funds to grow. This means that will need companies with solid cash reserves to invest. Venture Capital companies such Molten Ventures are investing in some of Europe’s most innovative start-ups: such a Paragraf at 2d graphene printing company. (FYI – I use Freetrade to invest commission free in these stocks)
For the everyday investor that does not want to invest in individual stocks – then a diversified portfolio that contains both value and growth stocks may suffice in the long-term. For an investor with a shorter time horizon – an ETF with specialist debt instruments, including corporate debt may be needed.
Traditionally oi and other commodities have been a good hedge against inflation. When the value of the dollar declines (a result of inflation) oil companies put their prices up. Whilst oil companies aren’t going anywhere any time soon, ESG or green energy companies may be a better long-term hedge.
What Is The Standard Solution For The Everyday Investor
Whilst all of this artificial intelligence talk is great, it’s not always realistic to invest in all these innovative start-ups or individual stocks. For my core portfolio I feel more comfortable tracking the overall economy. The world is either going to get through this, or it won’t. After all, it doesn’t matter if you’re holding a Royal Flush, if the Poker game has already ended.
Whilst I like to dabble and buy into a few interesting stocks, I much prefer an index fund (you can get my list of 8 funds here). These are all funds that have an allocation of 90%+ equities but if you want a more balanced portfolio here. (US based investors – here).
We may only be at the start of a prolonged bear market – as the super bubble collapses. For a young investor this means an opportunity to buy discounted stocks. We may lose money in the short term but there are strong potential gains following a recovery.
When investing capital is at risk.
Charting Your Trajectory To Financial Freedom (Passive Income > Expenses)
In my opinion the stock market is still a solid long term bet. With an average annual return of 7% it’s still likely to be the best vehicle to financial freedom. – Calculate how long it will take you to reach financial independence using my financial freedom calculator (excel document). Alternatively, use my Financial independence planner (google doc).
If you want to know how much you can realistically invest into an Index Fund? Check out an awesome little app called Nova Money. You can set a goal and it will use it’s clever AI to tell you how realistic it is. There is no point in asking what is the best hedge against inflation if you have no money to invest anyway. Especially in this climate when inflation is eroding your savings capacity.
It all starts with strong money habits and optimising your finances. Nova Money can help with that for sure! You can also get 3 months free premium with MSU’s unique link.
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