Think Inflation’s Ending? Think Again.
October 06, 2022
Read Time 4 MIN
Market Remains Overly Optimistic on Inflation
A major asset class has returned 15% year–to–date, 13% over the past year, 60% over the past two years and 47% over the past three years. Typically, we would call that a bull market. However, because this major asset class happens to be commodities—the most under–owned and hated asset class of them all—it is an easy bull market to dismiss. But why? Because many gave up on the strategic importance of commodities in their asset allocation in the face of the seemingly never–ending Federal Reserve (Fed) fueled bull markets in both stocks and bonds. Most investors totally missed the inflation call, and many continue to double down on that upside–down bet of transitory inflation. Most ‘knew’ that we weren’t going to get inflation. Just as they now ‘know’ inflation will soon permanently subside.
When will inflation fall back to the Fed’s 2% target? The consensus view in the market is that inflation will disappear by 2024. We think that view is overly optimistic—at best. Thanos Vamvakidis, a strategist for Bank of America (BofA) Securities in the U.K., recently released a piece that’s making its way around Wall Street trading desks. It shows high inflation regimes typically take about a decade to resolve. His analysis concludes that, on average, inflation takes about 10 years to return to 2% once it exceeds 5%.1
Return to Normal? It May Take Longer Than You Think
At VanEck, our group is called Multi-Asset Solutions—MAS for short. So, there’s no way that we could take a chart like this at face value without verifying the numbers. Surprisingly, we found that Mr. Vamvakidis’ results, just like the markets, paint too rosy of a picture of the future prospects for inflation.
Our main criticism is the start date. Mr. Vamvakidis started his analysis in 1980. This was already halfway through the last major global inflationary event. We corrected this by using data that went as far back as we could get—in this case, 1960. We also limited our analysis to G10 countries to avoid being accused of cherry–picking.
What did we find? Once inflation breached 5%, it took, on average, 18 years to fall to 2% or lower!
Number of Years for Year–Over–Year Inflation to Return to 2% (Following a Breach of 5%)
Source: Bloomberg, BofA Securities. Data as of September 2022.
Inflation: It Comes in Waves
The prior two major inflation regimes in the U.S. occurred in the 1940s and the 1970s. Both these events demonstrated that inflation is, typically, neither a linear nor an isolated event. Inflation is expected to come in waves with several different peaks and troughs. The inflation event of the 1940s lasted for a decade and had three major pricing surges. The great inflation of the 1970s saw a similar pattern. There were several inflationary surges and over a decade of price instability.
U.S. Consumer Price Index (CPI), Year–over–Year (%)
Source: Bloomberg.
In our view, the best interpretation of these results is that once the inflation genie is let out of the bottle, it is tough to put back in. Will it be five, ten, or more years? Only time will tell.
Let’s Get Real, Folks
Investors should brace themselves for an extended period of rising and falling inflation, with a mean level significantly above the Fed’s 2% target. Real assets are a time–tested inflation hedge, so if you haven't already, you may want to consider them. The charts below demonstrate the asset allocation benefits of commodities during previous inflationary regimes.
Rolling 3–Month Real Returns When S&P 500 Declines
Source: Bloomberg.
All eyes remain on the Fed. Surging interest rates on overleveraged economies globally have predictable results. We are likely heading into a severe and extended global recession. And the Fed is, finally, saying and doing the right things to combat inflation. Sadly, we believe we are too far down the inflationary path for a graceful ending. The economic shock will likely result in a systemic market event that requires liquidity to resolve. The recent market turmoil suggests to us that we are rapidly moving towards just such an event. Once again, the Fed will be forced to try to save the day. This time at the expense of inflation running significantly above its 2% target for an extended period.
In our view, the VanEck Inflation Allocation ETF (RAAX), a diversified inflation–fighting solution, presents a compelling investment.
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Important Disclosures
1 Source: https://business.bofa.com/en-us/content/market-strategies-insights/weekly-market-recap-report.html
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third–party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward–looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Consumer Price Index is an index of the variation in prices paid by typical consumers for retail goods and other items. Bloomberg Commodity Index is a broadly diversified index that tracks the commodity markets through commodity futures contracts and is made up of exchange–traded futures on physical commodities, which are weighted to account for economic significance and market liquidity. S&P 500 Index is widely regarded as the best single gauge of large–cap U.S. equities. The index is a float–adjusted, market–cap–weighted index of 500 leading U.S. companies from across all market sectors including information technology, telecommunications services, utilities, energy, materials, industrials, real estate, financials, health care, consumer discretionary, and consumer staples.
Benchmark index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.
The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2021 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spglobal.com/spdji/en/. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
An investment in the VanEck Inflation Allocation ETF (the “Fund”) may be subject to risks which include, among others, in fund of funds risk which may subject the Fund to investing in commodities, gold, natural resources companies, MLPs, real estate sector, infrastructure, equities securities, small–and medium–capitalization companies, foreign securities, emerging market issuers, foreign currency, credit, interest rate, call and concentration risks, derivatives, cryptocurrency, cryptocurrency tax, all of which may adversely affect the Fund. The Fund may also be subject to affiliated fund, U.S. Treasury Bills, subsidiary investment, commodity regulatory (with respect to investments in the Subsidiary), tax (with respect to investments in the Subsidiary), risks of ETPs, liquidity, gap, cash transactions, high portfolio turnover, model and data, management, operational, authorized participant concentration, no guarantee of active trading market, trading issues, market, fund shares trading, premium/discount and liquidity of fund shares, and non–diversified risks. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Small–and medium–capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
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Important Disclosures
1 Source: https://business.bofa.com/en-us/content/market-strategies-insights/weekly-market-recap-report.html
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third–party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward–looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Consumer Price Index is an index of the variation in prices paid by typical consumers for retail goods and other items. Bloomberg Commodity Index is a broadly diversified index that tracks the commodity markets through commodity futures contracts and is made up of exchange–traded futures on physical commodities, which are weighted to account for economic significance and market liquidity. S&P 500 Index is widely regarded as the best single gauge of large–cap U.S. equities. The index is a float–adjusted, market–cap–weighted index of 500 leading U.S. companies from across all market sectors including information technology, telecommunications services, utilities, energy, materials, industrials, real estate, financials, health care, consumer discretionary, and consumer staples.
Benchmark index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.
The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2021 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spglobal.com/spdji/en/. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
An investment in the VanEck Inflation Allocation ETF (the “Fund”) may be subject to risks which include, among others, in fund of funds risk which may subject the Fund to investing in commodities, gold, natural resources companies, MLPs, real estate sector, infrastructure, equities securities, small–and medium–capitalization companies, foreign securities, emerging market issuers, foreign currency, credit, interest rate, call and concentration risks, derivatives, cryptocurrency, cryptocurrency tax, all of which may adversely affect the Fund. The Fund may also be subject to affiliated fund, U.S. Treasury Bills, subsidiary investment, commodity regulatory (with respect to investments in the Subsidiary), tax (with respect to investments in the Subsidiary), risks of ETPs, liquidity, gap, cash transactions, high portfolio turnover, model and data, management, operational, authorized participant concentration, no guarantee of active trading market, trading issues, market, fund shares trading, premium/discount and liquidity of fund shares, and non–diversified risks. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Small–and medium–capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.