Uncertainty is the watchword here. High inflation. Grinding affordability challenges. Middle-class erosion. Rising interest rates. But forewarned is forearmed. I have three sectors whose stocks perform historically well in the face of inflation, advises Bill Patalon, chief stock picker at Stock Picker’s Corner.
Historical Rank No. 1: Energy – Hartford Funds researchers found that energy produced the strongest real returns during periods of high-and-rising inflation – outperforming inflation 74% of the time. During the inflation surge of 2021-2023, energy was the top-performing S&P 500 Index (^SPX) sector — by a wide margin. If inflation becomes entrenched anew, energy is the closest thing in stocks to a pure-play inflation hedge.
XLB (Red), XLF (Blue), XLE (Orange) - YTD % Change
Source: TradingView
Historical Rank No. 2. Financials – Research shows that financials are one of the sectors most likely to benefit from inflationary environments and higher interest rates. But it’s important to understand that financials aren’t inflation plays, per se: They’re rate-cycle plays. There’s usually a substantial overlap.
But there’s a critical caveat: Financials work best during gradual tightening cycles. And they can struggle when the Fed overtightens and triggers recession.
Historical Rank No. 3: Materials – Materials have been among the strongest performers during commodity-led inflation cycles, particularly when inflation is driven by supply shortages or infrastructure spending. Materials often work best just before inflation becomes front-page news.
