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Investing During Inflation (Part Six)

To Date

In the first five parts of this series, we looked at the correlation between investment returns and inflation, determining which investments had positive correlation and which had negative correlation. Most were negative, some surprisingly so, but there were most definitely some with positive returns during times of inflation.

Today, we are going to look at financials since intuitively banks make more money when interest rates are rising because their net interest margin expands, and interest rates historically have risen during periods of inflation. So, we would expect to see positive correlation between banks and inflation.

JPMorgan Chase

Negative correlation.

Bank of America

Negative correlation.

Implications

I don’t want to bore you with another series of graphs showing the same correlation pattern, but it exists.

I think what we see is that the intuitive pattern of rising inflation leading to rising interest rates leading to higher bank earnings exists – but only up to a point. There comes a point, if you recall the conversation we had on corporate bonds earlier in this series, where the financial health or corporate borrowers overcomes the benefit of higher rates and earnings fall due to defaults.

Up Next

Much like Consumer Staples companies that are believed to have pricing power to pass along their own rising costs of production to consumers, Health Care companies are believed to have that advantage as well. In the next post, we will look at various industries within the Health Care sector to determine if there is a positive or negative correlation between their returns and inflation.

—Mark