How Stocks Behave During Hyperinflation

During periods of hyperinflation, some stocks fare better than others.

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Hyperinflation is grim news for the economy. An inflation rate of more than 20 percent is considered hyper. Although it's difficult to predict how a stock market will behave during hyperinflation, some sectors will outperform others. When inflation hits this level, savvy investors might be able to protect themselves from financial catastrophe.

Stock Up

If history is any indication, some stocks can do quite well during periods of hyperinflation, said Matthew Tuttle, a money manager with Tuttle Tactical Management and author of "How Harvard and Yale Beat the Market." A 2004 Harvard study by John Y. Campbell and Tuomo Vuolteenaho backs that thinking. The study found that stock earnings and inflation move together. In a June 2008 MarketWatch article, Mark Hulbert interpreted that finding as evidence that stocks are a good hedge against inflation. Zimbabwe's stock market soared during its hyperinflation period of 2008. An October 2008 Business Weekly article states that investors in Zimbabwe believed the stock market was the only place to get a return on money.

Gold Rush

During hyperinflation, physical gold will be priceless, said Brenda Wenning of Wenning Investments in Newton, Massachusetts. Rob Russell, CEO and chief information officer of Ohio-based Russell & Company and author of "Retirement Held Hostage," agrees that natural-resource stocks should be more insulated than other sectors during periods of hyperinflation. Driving all this is a quest for safety, said Harlan Platt, professor of finance at Northeastern's D'Amore-McKim School of Business in Boston. The stocks of natural resources such as gold and metals will gain value. Resources that are in limited supply, such as oil, land and diamonds, will also fare well during hyperinflation.

What to Avoid

Cash, bonds and traditional investments should be avoided during hyperinflation. Equities, which are the ordinary shares of publicly traded companies, tend to be vulnerable in times of hyperinflation, Russell said. Tuttle added that cash will just lose value. Bonds pay fixed rates, so the payout on existing bonds won't increase with inflation.

Troubling Times

Though some sectors of the stock market might be bright spots during hyperinflation, the phenomenon will never boost a strong economy, Platt said. Hyperinflation should be considered a signal of fundamental weakness and instability. In the end, stocks will have little value if the currency becomes worthless, Wenning said. In this stage of inflation, the economy is on the verge of collapse.