I shared this chart of inflation by decade this past week:
I got a follow-up question in my inbox about this one from a reader:
What’s the investment implication of your inflation chart? Should I own more or less stocks when inflation is higher?
Good question.
Here’s a follow-up chart with annual stock and bond returns with the corresponding inflation rates:
Higher than average inflation has not hurt the stock market in the 2020s.
Sure, there was the 2022 bear market but this is the highest inflation rate since the 1980s and the stock market is compounding at 15% per year.
The stock market did just fine with relatively high inflation in the 1980s too.
Inflation averaged 5% that decade but the stock market did more than 17% annually.
The 1970s is the nightmare scenario where the sky-high inflation gets you. Real returns were negative for the decade.
The difference is that inflation was rising throughout the 1970s and falling from those high levels in the 1980s.
Bonds did similarly well in the 1980s but lagged in the 1970s just like the stock market.
But bonds have taken it on the chin in the 2020s.
Inflation is the biggest risk for government bonds over time but returns for fixed income are also impacted by starting yields and the direction of interest rates.
There’s no simple formula here.
If you’re a glass-is-half-empty person you’ll look at my chart and point to the fact that two of the past eight decades have seen stocks fall behind the inflation rate for a real lost decade.
That’s painful.
The glass-is-half-full version is that the stock market has compounded at 11.7% per year since 1950. Take away the 3.5% average inflation rate in that time and it gives you a real return of 8.2% per year.
More than 8% better than the inflation rate sounds like a pretty darn good long-term hedge to me.
I don’t know if that will repeat over the next 75 years but the stock market remains your best hedge against inflation in the long-run even if that’s not always the case in the short-run.
Further Reading:
Inflation is Not Going Back
This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.
References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.
The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers
Please see disclosures here.
