The Great Inflation, Factors, and Stock Returns

OpinioPro Selection
By November 22, 2021 08:17

The Great Inflation, Factors, and Stock Returns

“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” — Ronald Reagan

Inflation is an amorphous concept that generally refers to the sustained increase in the general level of prices. Inflation has been much maligned due to the deleterious impact of the ‘Great Inflation’ era of the 1960’s and 1970’s. That period conjures images of long gas lines, commodity shortages, paltry real investment returns, and price spikes.

Since then, however, we have lived through the ‘Great Moderation’—four decades of low and decreasing inflation. Memories of the inflationary periods of the past, however, remain so visceral that signs of rising prices have recently plagued investor sentiment. Our analysis suggests that while investors are right to pay attention to inflation, comparisons with the 1970s may be overblown. Equities, as a whole, may not welcome high rates of inflation, but certain stock selection factors have shown more resilience than others in periods of rising prices.

Although Milton Friedman famously argued that “inflation is always and everywhere a monetary phenomenon”, price increases can be driven by an almost infinite set of variables. Our post-Global Financial Crisis (GFC) experience offers supporting evidence, as monetary policy has been as exceptionally loose but avoided even a brief spike above the long-run historical inflation average. In mature developed markets like Europe and Japan, even a peak above 2% would have been an achievement in retrospect. In short, loose monetary policy often precedes inflation, but is not the sole driver.

Since 1926, …

OpinioPro Selection
By November 22, 2021 08:17

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