Contributed by: Nicholas Boguth
There is a lot of talk about inflation in the news lately, and whether or not the recent spike is “transitory” or if the recent rise in price levels will persist into the coming months, years, or even longer. The problem with forecasting inflation is that it cannot be accurately forecasted. It is a complex topic with ever-changing variables beyond the Fed and money supply including (but not limited to) consumer spending, saving rates, supply chains, government policy, demographics, technological advancements, and much more.
For some high-level context, I wanted to look at the relationship between inflation and stock returns over the past 30 years.
Below, you’ll see a scatter-plot of 1-year changes in CPI and the S&P500. What stands out to me is that an overwhelming majority of those dots are in the top right corner of the graph – positive inflation and positive stock returns. A lot of news headlines we see will put the word “fear” directly next to the word “inflation” because, well…that is what headline writers are paid to do. The reality is that if you look at the long term history of stock performance, you will see that it is positive a vast majority of the time regardless of what happened with inflation.
Source: Morningstar Direct. S&P 500 TR. Monthly return data.
Investors need to prepare one way or another, and a great way to do that is to talk to your financial advisor and make sure that you are setting yourself up for success no matter what happens with inflation. Helping to maximize your probability of success is something we help all of our clients with, and it may look different for each investor depending on time horizon, risk tolerance, and investing/spending goals. Give us a call or shoot us an email if you have any questions on how to help maximize yours.
Nicholas Boguth is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Boguth and not necessarily those of Raymond James.