Inflation is Alive and Well…
Recent data has shown, beyond a shadow of a doubt, that inflation is alive and well. However, the extent to which inflation will subsist, both in terms of severity and duration, is debatable. Some economists believe it will persist while others believe it is simply transitory.
The time horizons for transitory inflation versus persistent are subjective. How long is transitory? For one investor it may be a few months, to another transitory inflation could last a year or more. It really all depends on one’s time horizon.
But rather than speculate on inflation, which like the market, no one can predict, it may be wiser to focus on learning from past bouts of inflation. We have a few good examples.
In the 1940’s inflation spiked significantly, with the rate increasing to 15% at one point and north of 17% at another point. Both were temporary (transitory), but painful, nonetheless. So how did stocks do during this inflationary decade? Very well! The S&P 500 had average annual returns of 9.2% that decade.
The 1970’s also experienced two inflation spikes and had the highest average inflation rate at 7.4%. Even so, the market produced positive annual returns through the decade.
Perhaps most surprisingly is that the worst market performance over a decade was 2000, when the inflation rate averaged a low 2.5%.
Such data demonstrates that even if we knew for sure what inflation would be, we wouldn’t know how the market would perform. Inflation is not predictive of future market performance. That is largely why it is best to ensure that our financial decisions are based on our individual investment plan, irrespective of the concern or fear du jour.
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