I shared this chart of inflation by decade this previous week:
I acquired a follow-up query in my inbox about this one from a reader:
What’s the funding implication of your inflation chart? Ought to I personal kind of shares when inflation is greater?
Good query.
Right here’s a follow-up chart with annual inventory and bond returns with the corresponding inflation charges:
Increased than common inflation has not damage the inventory market within the 2020s.
Certain, there was the 2022 bear market however that is the very best inflation fee because the Eighties and the inventory market is compounding at 15% per yr.
The inventory market did simply tremendous with comparatively excessive inflation within the Eighties too.
Inflation averaged 5% that decade however the inventory market did greater than 17% yearly.
The Seventies is the nightmare state of affairs the place the sky-high inflation will get you. Actual returns have been damaging for the last decade.
The distinction is that inflation was rising all through the Seventies and falling from these excessive ranges within the Eighties.
Bonds did equally nicely within the Eighties however lagged within the Seventies similar to the inventory market.
However bonds have taken it on the chin within the 2020s.
Inflation is the largest danger for presidency bonds over time however returns for fastened revenue are additionally impacted by beginning yields and the course of rates of interest.
There’s no easy system right here.
Should you’re a glass-is-half-empty individual you’ll take a look at my chart and level to the truth that two of the previous eight many years have seen shares fall behind the inflation fee for an actual misplaced decade.
That’s painful.
The glass-is-half-full model is that the inventory market has compounded at 11.7% per yr since 1950. Take away the three.5% common inflation fee in that point and it offers you an actual return of 8.2% per yr.
Greater than 8% higher than the inflation fee appears like a reasonably darn good long-term hedge to me.
I don’t know if that may repeat over the subsequent 75 years however the inventory market stays your finest hedge towards inflation within the long-run even when that’s not all the time the case within the short-run.
