Inflationary Regimes and Asset Class Performance

1 December 2021

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Inflation has stayed mostly in check over the past three
decades, and often ran below most developed markets’
central bank mandates. The Covid-19 crisis and the policy
direction that the Federal Reserve and US government have
since taken, has, again, led to a lively debate about the likely
path of inflation. Many think this debate is a non-starter.

 

However, some – and select market data suggest the same –
believe the Fed has ‘out-doved’ itself, suggesting inflation
may not remain ‘transitory’. Any growing risk of uncontrolled
inflation, which might push the Fed’s hand in changing tack
on its monetary policy path sooner than signalled, will, most
likely, rattle markets and test the US government’s
determination to continue stimulating. Investors are, as a
result, keeping a close eye on inflation.


In the first of a series of notes we propose a systematic
technique of identifying inflationary regimes and measure
the performance of key asset class benchmarks and
alternatives in those regimes. We show that systematic
macro and trend following strategies perform well during
inflationary regimes, outperforming both during periods of
higher levels of inflation, and, especially during periods
featuring a higher rate of change in the level of inflation.
Throughout, we opine on what inflation could mean for asset
allocation, how markets typically react to inflationary news,
how well they forecast future inflation, and discuss some of
the implications for a rising inflation regime. We focus on the
US case.

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