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CHAPTER 4: The Energy Sector > Strong Inflation Hedge

Strong Inflation Hedge

Part of the case for a separate allocation to energy stocks is the fact the sector will outperform and will provide an investor diversification during period of inflationary times. Chen and Pinsky [2002]2 found that during a period from 1970 to 1981 energy stocks dramatically outperformed broad-market stocks. In the first nine months of 1979, average annual inflation jumped to 10.75%. This dramatic rise was due to a new round of oil price increases. The energy sector also excelled in this period of booming commodity prices and rising inflation. In 1979, energy stocks were up 68%. The sector also excelled in 1980, rising an additional 83%. Evidence from the 1970s supports the contention that energy stocks benefit most during periods of rising inflation and oil prices.


  

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