Stocks and Commodities historically outperform bonds and cash in periods of high inflation

As the chart shows:

The inflation rate has averaged 2.3% annually for the last 25 years, but it has often varied around this long-term average. It’s been as low as 0.1% in 2008 and as high as 3.4% in 2000

Over that time period, stocks (with a return of 9.8%) have outperformed bonds (6.2%) and cash (2.9%). Commodities returned -0.5%.

Yet, when you look at the returns of these asset classes only in years with above average inflation, commodities significantly outperformed the other asset classes, returning an average of 14.4%. Stock returns were also strong, with an average of 10%.

Inflation and Federal Funds Rates

It’s not possible to predict inflation with certainty, but historically inflation has risen or remained flat following sharp declines in the federal funds rate.

The chart below shows the movement of the federal funds rate versus the inflation rate over the 25-year period from 1989 to 2013.

Back of Chart

Inflation Historically rises or remain flat following significant declines in the federal funds rate

As the chart shows:

The Federal Funds Rate is historically low following dramatic decreases.

Inflation has increased following two of the last three significant decreases in the Federal Funds Rate (including the current decrease).

In the third instance, inflation remained flat.

Investing involves risk, including possible loss of principal.

Diversification and asset allocation may not protect against market risk or loss of principal.

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