The word “inflation” carries with it a negative connotation, and we’ve certainly been hearing about it more and more this year. After last year’s economic shocks and the shutting down of large swaths of the global economy, it’s not surprising to see prices for most goods and services rebounding.
You likely have instances during your daily activities where you’re seeing inflation rear its ugly head. In my life, I’ve seen it firsthand recently as we set out to buy our oldest daughter Ava her first vehicle. She’s had her drivers license for over a year and we put off this adolescent milestone as long as possible, but given our family schedule we desperately needed another “driver” in the house. Shopping for a vehicle is never a pleasant exercise, and to make the process more challenging, we experienced firsthand several of the many things worrying investors these days – a labor shortage (car dealerships with empty offices and nobody to help with our questions), supply chain issues (desolate dealership lots holding maybe a dozen or so vehicles where hundreds typically exist), and price inflation (due to low supply, pricing for the same vehicle many times was 20% higher than a year ago).
Maybe you’re seeing inflation in other areas of your daily life – perhaps buying groceries at the supermarket, trying to buy a new washer or dryer, or shopping for a new home. It’s certainly frustrating and it may seem like we’ve entered a new economic reality, but the current velocity of price increases shouldn’t persist forever. Inflation will always be a factor in our economic lives, but the recent spike will eventually level out.
Investors may be wondering 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.
Over the last 20 years, one-year returns on US stocks have fluctuated widely. Yet weak returns occurred when inflation was low in some periods, and 23 of the past 30 years saw positive returns even after adjusting for the impact of inflation. That was the case in the first six months of 2021 as well.
Over the period charted above, the S&P 500 posted an average annualized return of 8.5% after adjusting for inflation. Going all the way back to 1926, the annualized inflation-adjusted return on stocks was 7.3%.
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.
If you have questions related to inflation, or how we are protecting you from it with your portfolio design please let us know. If you have a friend or family member with concerns about inflation, we’d be happy to talk with them and educate them on our perspective.
Written by Jim Miller, CFP®