We have written a number of articles on the impact of inflation on future bond and stock returns. Our recent article from earlier this month, Inflation And Its Influence On Investment Classes, pointed to the fact that stocks are a good hedge against higher inflation rates versus bonds. At very high levels of inflation though, commodities are the better performing asset class.
The more significant factor, however, is the growth of the economy as measured by GDP. As the below chart shows, the S&P 500 Index continues to move higher in spite of the fact the year over year change in inflation (blue line) is muted. The equity market performs at its worst when GDP (green bar) is contracting and the economy has entered a recessionary period. Earlier in April, the month over month change in the consumer price index was reported at minus .2%. This negative CPI report had some strategist indicating the weaker equity returns for the week of 4/15 was partially due to a deflationary scare.
|From The Blog of HORAN Capital Advisors|
For investors then, paying attention to economic variables that might indicate a recession is forthcoming is of greater importance than inflation in and of itself. Some of the variables to watch are: jobless claims, durable goods orders, retail sales, existing home sales, consumer confidence and the interest rate spread. We touched on these data points in an article a few years back, Economic Indicators That May Signal A Bottom In The Economy, when we were looking for an economic upturn.