The best inflation-fighting investment for 2023 offers 3 other advantages vs. the stock market, says this analyst


Barbara Colmeyer

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Investors are stepping up the scale of consumer price index (CPI) data that has predictably started to cool, and for many they want the Fed to go in a less aggressive direction when it comes to rate hikes. So the S&P 500 may be on track to reach the psychological level of the 4,000 level later.

Inflation has a lot of focus in today’s call by asset manager and exchange-traded fund provider Wisdom Tree.

“Inflation has been a key concern for investors over the past two years and will continue to be a key consideration next year, but we believe there are other reasons to consider an allocation to commodities in addition to inflation.” , Nitesh Shah, told clients in a note on Thursday about head commodities and macroeconomic research.

First, we explain how commodities continue to be the best inflation hedges through long-term historical data that show them to be one of the most inflation-sensitive asset classes.

He divides the inflation rate into “expected”, which is the T-Bill rate proxy, and “unexpected”, which is the realized inflation rate minus the T-Bill rate. As for the latter, it’s something we’ve definitely seen in the last two years, but few assets have risen like commodities.Shah offers the chart below.

A broad range of commodities also perform well against expected inflation, so the asset class could remain a “significant hedge,” he says.

What is the next economic cycle? Shah sees inflation stuck at a stubbornly high level of at least 3.5%, and that the world has long been stuck in a phase of high inflation and low growth.

“I emphasize that this is not bad for commodities. In fact, with the U.S. dollar no longer rising, one headwind has returned to broader commodities and gold: U.S. Treasury yields have peaked. As it looks like, another headwind has been removed for gold as well,” Shah wrote. .

READ: Gold hits eight-month high on Wednesday, ‘golden cross’ ahead

As to why it’s more than just an inflation hedge, Shah points out that the low correlation between commodities and most other assets makes them a useful diversifier.

And these low correlations have persisted in times of crisis, such as when US stocks fell more than 5%, says Shah.

“On average, in every month since the 1960s when U.S. stocks fell 5% or more, commodities fell 0.65%. In every month U.S. stocks rose 5% or more, commodities rose 1.13%.” he points out.

“So while commodities are cyclical (i.e. they tend to lose and gain roughly the same as stocks), the amplitude of such gains has been significantly reduced. Investors who fear can hedge with commodities.Exposure.”

Finally, commodities are a place ahead of the big changes he sees as last year’s energy crisis will accelerate Europe’s transition to renewable resources, he says.

“We believe it will be a positive demand for metals. Electrification of energy production (which entails moving to renewable energy instead of burning hydrocarbons) will require more power distribution and transmission cables, more energy infrastructure. We need more structures, and more batteries,” says Shah.

An acceleration of decarbonization technologies is also likely, as most countries are far behind their climate change goals. In addition, tight oil and gas markets have been undone by underinvestment in conventional energy sources, on which the world remains heavily dependent. “Commodities provide essential ingredients to manage this transition and are likely to be profitable,” says Shah.

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After that CPI data, stocks opened slightly higher, bond yields were cut, the dollar fell sharply, and oil and gold prices rose.

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CPI fell 0.1% in December, as expected, marking its first drop since May 2020.

Weekly unemployment claims increased by 205,000, slightly below expectations that the federal budget is still pending. Philadelphia Fed President John Harker said he would support slowing the pace of rate hikes to 25 basis points at future Fed meetings, ahead of comments from St. Louis Fed President James Bullard and Richmond Fed President Tom Birkin.

Elsewhere, the latest data show China’s inflation rate is rising, with the CPI rising from 1.6% to 1.8% in December. Pork prices slowed to a 22% rise from he 34% in November.

Contract chip maker Taiwan Semiconductor Manufacturing (2330.TW) warned that the economic downturn and inventory adjustments will hurt its revenue and profit margins. Stock prices are rising. The company also reported record results.

Infosys (500209.BY) shares have risen after the India-based digital services and consulting firm reported better-than-expected revenue and profits.

The Walt Disney Company (DIS) Board of Directors has announced that it has elected independent director Mark Parker, who served seven years on the Disney board and is executive chairman of Nike (NKE), as chairman.

Big banks like JPMorgan (JPM), Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC) are just one day away from reporting their fourth quarter results.

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Prosecutors have arrested a group of bogus pastors in Baltimore and Washington, DC who targeted immigrants with a $28 million Ponzi scheme.

JPMorgan Chase is suing the 30-year-old founder of the high-profile fintech startup it acquired for being sold on lies involving millions of fake customers.

Russia replaced its commander-in-chief for the war in Ukraine, ousting General Sergei Slovikin after just three months in service.

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Thoughts on electric cars by @BrianGitt:

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Ticker  Security name 
BBBY    Bed Bath & Beyond 
TSLA    Tesla 
GME     GameStop 
AMC     AMC Entertainment Holdings 
MULN    Mullen Automotive 
NIO     NIO 
TSM     Taiwan Semicondutor Manufacturing 
APE     AMC Entertainment Holdings preferred shares 
AAPL    Apple 
AMZN    Amazon.com 

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-Barbara Colmeyer

 

(Closed) Dow Jones Newswire

01-12-23 0935ET

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