Investors may wonder whether stock returns will suffer if inflation keeps rising. Here’s some good news: Inflation isn’t necessarily bad news for stocks.
A look at equity performance in the past three decades does not show any reliable connection between periods of high (or low) inflation and US stock returns.
Since 1993, one-year returns on US stocks have fluctuated widely. Stock returns can be strong, or weak, or in between when inflation is high. For example, returns were relatively strong in 2021 but poor in 2022. Twenty-two of the past 30 years saw positive returns even after adjusting for the impact of inflation (see Exhibit 1).
Over the period charted, the S&P 500 posted an average annualized return of 7.0% after adjusting for inflation. Going all the way back to 1926, the annualized inflation-adjusted return on stocks was also 7.0%.
History shows that stocks tend to outpace inflation over the long term—a valuable reminder for investors concerned that today’s rising prices will make it harder to reach their financial goals.
DIMENSIONAL FUND ADVISORS AND TRIAD ADVISORS ARE NOT AFFILIATED.
1. Real returns illustrate the effect of inflation on an investment return and are calculated using the following method: [(1 + nominal return of index over time period) / (1 + inflation rate)] − 1. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
2. Based on nonseasonally adjusted 12-month percentage change in Consumer Price Index for All Urban Consumers (CPI-U). Source: US Bureau of Labor Statistics.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss.
There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal.
All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision
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