Some empirical evidence indicates, that the stock market tends to perform poorly during inflationary period.
It depends on the targeted stocks performance, targeted financial market, and it depends a lot on investor's behavior. "fire and forget" does not work well in investments. There are no "bullet proof" investment strategies.
If we speak of mass behavior, if investors stampede to buy stocks, stocks will outperform inflation, if they stampede out, tough luck.
I don't think a clear answer like yes or no can be a good answer to your question.
I agree is an answer type "it depends...".
If the markets would be efficient in the absolute sense, investments in common stocks could be a good hedge against inflation. However, even then, it is possible that some fundamentals to be affected by the inflation.
If the investors' reaction is more based on psychology than on finance (see mainly the papers regarding Efficient market hypothesis and behavioral finance), it is possible that common stock to be strongly affected by the inflation.
In the long run, common stocks should prove a good hedge against inflation.
If you consider that, on average, expenses, income and corporate earnings should behave like inflation (all things being equal) then so should stock prices.
Keeping in mind that:
1. idiosyncratic features of a company or an industry (like structure of the debt fixed/variable) may lead to immediate significant impact, (we are speaking of stock markets a s a whole),
2. in the short run, rebalancing between stock and bonds, could weigh on stock markets,
3. ... and in the short run, why should financial markets become rationale all of a sudden?
I agree with Mr. Oudet, you'd have to first determine if you are hedging in the long run or just for a short period of time. You'd also like to know if inflation was expected or unexpected, what the interest rates are and how strong/weak the dollar is and a number of other key indicators that could signal when gold or stocks are sensitive to inflation .
Look for causality and not for correlation, which are two concepts that are absolutely misused as being the same thing. Fundamentals are also important, but only when people begin to care about it. You could go wrong betting against the mass behaviours that Mr. Bolos refers to, even if the mass is fundamentally wrong.
As for anything being a good hedge you must also take into account some technical aspects of your implementation and the timing. You can trade the same idea in a number of ways.
I think "it depends" is a good answer. But much depends on the type of inflation and its less depenent on the type of securities. For example, when we have inflation is caused by the production, the value of most manufacturing companies will increase and investment in common stocks is a good hedge against inflation.
So first we should investigate the causes of inflation and then take the right decision to invest.
One thing not mentioned here but is vitally important is the interaction of inflation and the taxation of capital. I think this was very important in the 1970s as an explanation of why stocks performed so poorly. It is a long topic so let me give a couple of examples. First, when inflation took off in the early 1970s (in the UK at least) companies were hit with big tax bills for stock (inventory) appreciation. Even though these goods would have to be replaced at even higher prices, FIFO accounting resulted in massive tax bills, which threatened the solvency of many companies. Second, the capital taxation system taxes nominal returns. so the effective tax rate rises sharply with inflation.
I can see the different angles you are looking at the question whether 'investment in common stock is a good hedge against inflation'. All your contributions have been informative.
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