The past 12 months have witnessed the largest spike in inflation, measured by CPI, in the past 25 years. Year over Year CPI has moved from just 0.2% in June 2020 to 5% or a change of 2400% (chart 1). Will inflation worsen or taper off? How will the FED respond? These are all valid questions, but in this report TPA ignores predictions and instead looks at the historical performance of U.S. sectors, broad stock categories, and subsectors in the 12 months that followed previous spikes in inflation.
RECENT YEAR OVER YEAR CPI
Specifically, TPA examines the performance of sectors, broad stock categories, and subsectors in the 7 periods that followed CPI increases of 176%, 172%, 176%, 300%, 254%, and 2 periods that had large moves from negative to positive inflation in the periods 7/31/00 to 7/31/01, 3/31/03 to 3/31/04, 9/30/05 to 9/30/06, 7/31/08 to 7/31/09, 12/31/09 to 12/31/10, 9/30/11 to 9/30/12, and 2/28/17 to 2/28/18. These periods are highlighted in chart 2.
YEAR OVER YEAR CPI SINCE 1995
Finally, TPA examines performance rank differences between all the inflation spike periods and the 2 periods in which the stock market had enjoyed a significant rally prior to the inflation spike.
After averaging performance the 12 months following the 7 periods of inflation spikes, the following was observed:
SECTORS:
The results for sectors are observed for U.S. sectors (table below). The top 3 performers were Consumer Discretionary, Materials, and Financials. The worst 3 performers were Utilities, Energy, and Telecomm* (*the Telecomm Index composition is different now than it was over all of the past 25 years).
BROAD MARKET CATEGORIES:
The top 2 categories following inflation spikes have been Small Cal Value and Small Cap. The 2 lowest-ranked categories have been Large Cap Growth and LargeCap.
SUBSECTORS:
The top 10 subsectors were:
The bottom 10 subsectors were:
TPA notes that 2 of the previous inflation spike periods involved large market rallies and, therefore, could be analogous to the current period. Of course, this ignores other differences between the periods, but the results show that there is a vast difference in performance rank when large market rallies coincide with inflation spikes. The table below compares the 12-month performance periods following ALL the inflation spike periods to the 12-month performance following 2 of the previous spike periods when the market had had a significant rally (7/31/00 and 7/31/08).
YEAR OVER YEAR CPI – 2 PERIODS WITH SPIKES AND PREVIOUS MARKET RALLIES HIGHLIGHTED
As the table below shows, there were significant changes in performance rank for U.S. sectors and broad categories if we look at the stock market’s performance coincident with the inflation spikes. In the cases in which the market had rallied, more defensive sectors like Staples, Health Care, and Utilities did better, whereas Discretionary, Materials, Industrials, Financials, Real Estate, and TECH did not fare as well. Following market rally periods, Value outperformed Growth and Small Cap categories did not perform as well as Large Cap categories.
TPA clients should take into account these historical patterns when deciding on portfolio construction.
