<p><img src="https://static5.businessinsider.com/image/6026ebd72edd0f001a8d5a61-1024/GettyImages-74250387.jpg" border="0" alt="Traders in the S&P 500 stock index futures pit signal offers near the close of trading at the Chicago Mercantile Exchange May 23, 2007" data-mce-source="Scott Olson/Getty Images" data-mce-caption="Traders in the S&P 500 stock index futures pit signal offers near the close of trading at the Chicago Mercantile Exchange May 23, 2007" data-link="https://www.gettyimages.co.uk/detail/news-photo/traders-in-the-s-p-500-stock-index-futures-pit-signal-news-photo/74250387'adppopup=true"></p><p></p><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><p>If inflation is a problem for markets, it seems like a problem that's pretty <a href="https://www.businessinsider.com/biden-stimulus-inflation-risk-economic-growth-wall-street-bank-economists-2021-2">far off in the distance</a>.</p><p>After all, inflation has remained stubbornly low for decades now, and interest rates will be parked at zero for a long time to come. Right now, investors seem content to enjoy the recovering economy without worrying about inflation, for once.</p><p>John Normand, the head of cross-asset fundamental strategy at JPMorgan Chase, sees their point, but says it would be better if they prepared sooner.</p><p>"It seems premature to fret about an inflation overshoot when +2% core has been so rare over the past 30 years, and when only much higher inflation is associated with worse Equity performance," he wrote. "But the economy is more leveraged than in previous eras."</p><p>That means investors need to be aware that even a small inflation "overshoot" might create big changes in market performancethe kind investors might associate only with runaway <a href="https://www.businessinsider.com/stock-market-outlook-inflation-how-to-position-what-to-expect-2021-2">inflation</a>.</p><p>So what is the right defense against that kind of shift'</p><p>"The best hedges for a too-hot economy should consider historical performance in higher-inflation regimes plus current valuations and carry," Normand answers. "Historical return sensitivity to inflation regimes is a starting point, but current valuations and carry matter too, if this might be a hedge that should be held for years."</p><p>Taking into account the expenses and the cost of <a href="https://www.investopedia.com/carry-trade-definition-4682656">carry</a> for a variety of asset classes, Normand came up with this framework. He says they offer substantial carry, which means their returns outweigh the costs associated with maintaining positions in them. This makes them an effective hedge, while their costs are low in comparison to other options.</p><p><img src="https://static6.businessinsider.com/image/603428ba38aa9f00185e053c-1946/Screen Shot 2021-02-22 at 45650 PM.png" border="0" alt="Inflation hedges" data-mce-source="JPMorgan" data-mce-caption="John Normand of JPMorgan Chase uses this chart as a framework to identify the asset classes that will provide investors with affordable protection against inflation."></p><p>"The best hedges are those that trade cheap to their longterm average and offer positive carry," Normand said. "Currently these are a <strong><a href="https://markets.businessinsider.com/etfs/ubs-etracs-bloomberg-commodity-index-total-return-etn-us9026416795">broad Commodities index</a></strong>, followed by the <strong><a href="https://www.bloomberg.com/quote/BCOMAG:IND">Agricultural sub-index</a></strong>, <strong><a href="https://markets.businessinsider.com/commodities/oil-price'type=brent">Oil</a></strong>, <strong><a href="https://markets.businessinsider.com/etfs/vanguard-energy-index-fund-etf-shares-us92204a3068">Energy Equities</a></strong> and <strong>EM Commodity FX</strong>," meaning a basket containing the <a href="https://markets.businessinsider.com/currencies/usd-zar">South African Rand</a>, <a href="https://markets.businessinsider.com/currencies/usd-rub">Russian Ruble</a>, and <a href="https://markets.businessinsider.com/currencies/usd-brl">Brazilian Real</a>.</p><p>In contrast he warns that the worst options are costly and have little or no carry. Examples include base metals, gold, and Group of 10 currencies like the Australian, New Zealand, and Canadian dollars.</p><p>Normand emphasizes that he isn't telling investors to set up these hedges because a market collapse is imminent.</p><p>"This year we've been comfortable investing in the face of a seemingly risky Fed/fiscal experiment," he said, because there's little risk of a rise in inflation in 2021 and 2022, and even if inflation starts to pick up, that will be positive for stocks in the early stages even though it's negative for the bond market.</p><p>However he says he'll start getting worried if real US rates rise by 50 basis points or more, if the bond market grows volatile because inflation is strong enough that investors start doubting the Federal Reserve's guidance.</p><p>When the Fed does start to taper its stimulus effortsNormand says that will probably happen in 2022investors should handle it by staying overweight in stocks because of their lower sensitivity to interest rates, especially cyclical and value stocks that will benefit from higher rates.</p><p>Other recommended tactics include "holding bond curve steepeners and overweighting inflation breakevens; only holding Credit with a high enough running yield to offset duration losses (US HY and EM Sovereigns/Corporates rather than High Grade); treating EM Bonds and FX much more tactically than what a global economic boom might otherwise suggest," he said.</p><p><strong>SEE ALSO: <a href="https://www.businessinsider.com/stock-picks-to-buy-cheap-small-caps-economic-upside-bofa-2021-2" >Bank of America says buy these 14 cheap stocks that are best positioned to soar on the strongest economic comeback in nearly 40 years</a></strong></p><p><a href="https://www.businessinsider.com/investing-strategy-how-to-hedge-a-portfolio-against-inflation-jpm-2021-2#comments">Join the conversation about this story »</a></p> <p>NOW WATCH: <a href="https://www.businessinsider.com/candy-corn-ingredients-made-of-gelatin-lac-resin-halloween-sugar-syrup-2017-10">What candy corn is actually made of</a></p> Click here to read full news..