S&P 500: Here’s The Best Asset To Own When Inflation Strikes

Worried about inflation? You should be — especially if you own the wrong assets and bet against S&P 500 stocks.


And what are the right and wrong assets to own during inflationary times? Wells Fargo looked at 15 major asset classes and calculated which ones did the best and worst during inflationary periods since 2000.

The findings are instructive.

It boils down to this: Inflation is bullish for oil and emerging markets stocks. And stocks in general do fine during periods of rising inflation, too. But you want to brace for losses from most types of bonds when inflation heats up.

It’s a good reminder to not automatically hit the sell button on S&P 500 stocks if there’s a whiff of inflation.

Stocks “as a group have generated impressive returns in periods of rising inflation, with levels that significantly surpassed the impact of inflation,” said Chao Ma of Wells Fargo’s global portfolio and investment strategy group, in a report.

Top Assets During Inflation

If you want to know what to own during inflation, know one word: Oil.

It’s no AMC Entertainment (AMC) stock. But Wells Fargo found the price of oil to jump more than 40% during inflationary periods since 2000. It surely tops the 10% inflation-period gain of U.S. large stocks like the S&P 500.

Oil’s inflation-times rise is also more than any other major asset class the bank looked at. Oil’s gain during inflationary periods is also roughly three-times higher than the average 12% rise of all 15 assets Wells Fargo studied.

Remarkably, investors have already sniffed this out. The United States Oil Fund (USO), a major ETF that tracks the price of oil, is up 43.2% in 2021 so far. That’s a larger jump, too, than any other ETFs tracking the asset classes Wells Fargo analyzed.

What’s the No. 2 top asset class in times of inflation then? It’s not gold — that’s third (with a 16% inflationary period rise). It’s emerging markets stocks, which put up 18% gains during periods of inflation post 2000, Wells Fargo found.

And if that’s the case again now, there could be some upside left. The Vanguard FTSE Emerging Markets ETF (VWO) is up just 6.6% this year.

Drilling Into Stocks, In The S&P 500 And Out

What does inflation do to S&P 500 stocks and others? Small stocks top large ones. And S&P 500 growth stocks outperform value.

This is a bit counterintuitive as energy sector stocks are typically included in value indexes and ETFs. And yet S&P 500 value stocks rose just 8% during inflationary periods. That’s nearly half the 12% gain by growth stocks. And value stocks’ return was half the 16% rise of cyclical stocks, which tend to rise and fall along with the strength of the economy.

And if growth is good, small stocks are even better. U.S. small cap stocks rose 15% during inflationary times since 2000. Presumably smaller companies serve niches with harder-to-substitute goods. That gives them some pricing power. Additionally, smaller companies are usually growing faster than larger firms.

The iShares Core S&P Small-Cap ETF (IJR) is flying this year: up 22.1% so far.

The Bottom Line: Be Inflation Smart

Don’t let the risk of inflation chase you out of S&P 500 stocks. Or stocks in general for that matter. The headlines are scary, but data since 2000 show stocks can still put up impressive gains amid inflation.

And if you’re willing to do some homework, you can find market-topping opportunities even if prices head higher.

But with that said, expect some pain from your bonds. Bonds are still worthwhile for a diversified portfolio. And a 5% decline in investment grade bonds during inflation is hardly a catastrophe.

Still, inflation is a heads-up for many investors who own bond funds. The Vanguard Total Bond Market ETF (BND) is down nearly 3% this year.

“We favor (stocks) in the current environment of economic expansion and rising inflation,” Wells Fargo’s Ma said. “They offer the potential for both long-term price appreciation and a desirable level of income.”

Best And Worst Assets During Inflation

Asset Inflationary return* Representative ETF Symbol YTD % Ch.
Oil 41% United States Oil Fund (USO) 43.2%
Emerging market stocks 18% Vanguard FTSE Emerging Markets (VWO) 6.6%
Gold 16% SPDR Gold Trust (GLD) -6.8%
Cyclical stocks 16% Invesco DWA Consumer Cyclicals Momentum (PEZ) 17.9%
U.S. small cap stocks 15% iShares Core S&P Small-Cap (IJR) 22.1%
TIPS 13% iShares TIPS Bond (TIP) -0.1%
High-quality stocks 12% iShares MSCI USA Quality Factor (QUAL) 12.3%
Growth stocks 12% SPDR Portfolio S&P 500 Growth (SPYG) 8.4%
Developed market ex U.S. stocks 12% iShares Core MSCI EAFE (IEFA) 9.2%
Defensive stocks 10% Invesco Defensive Equity (DEF) 10.9%
U.S. large cap stocks 10% SPDR S&P 500 ETF Trust (SPY) 13.0%
Value stocks 8% SPDR Portfolio S&P 500 Value (SPYV) 18.1%
High-yield fixed income 5% High Yield (HYLD) 2.2%
Investment grade fixed income -5% Vanguard Total Bond Market (BND) -2.8%
Emerging market fixed income -8% iShares J.P. Morgan USD Emerging Markets Bond (EMB) -3.2%
Sources: Wells Fargo, IBD, S&P Global Market Intelligence, * – based on periods of inflation post 2000
Follow Matt Krantz on Twitter @mattkrantz


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