Now that we’re aware of the challenges to our purchasing power, can we find some good news? Yes, we can. Historically, inflation has been good for the stock market, according to data compiled from Bloomberg.
In the period spanning from 1960 to 1973, we saw a CPI of 2.9% before stagflation (increased inflation plus slow economic output) took hold. Value stocks — think stocks that for the most part pay out dividends and trade at relatively lower trading multiples — did really well, climbing 12.5% annually. Growth stocks — companies who are generally more focused on growing than returning profits to shareholders in the form of dividends — grew 9.3% per year during these 12 years. The S&P 500 index was up 9% annually during this time.
From 1973 to 1982, stagflation popped in for a visit. A lot of people are not very fond of the period in time, but the annual numbers tell a slightly different story. Value stocks were up 10.9%, growth stocks 2.1%, and the S&P 500 4.7%. Value stocks outperformed both the S&P 500 and growth stocks during this period of elevated inflation.
After that period of stagflation, we saw a CPI of 3.2% from 1982 to 2008. Even through the dot-com bubble, on an annual basis value stocks still grew 9.5%, growth stocks 8.5%, and the S&P 500 11.2%.
More recently, the years immediately following the financial crisis of 2008 look even better for investors. From 2009 to 2021, with a CPI of 1.6%, value stocks grew at an impressive annual rate of 12.4%. Growth stocks outperformed, increasing annually during this time by 18.4%, and the S&P 500 increased by 15.2%.
What does this mean? The S&P 500 has performed well in each of these inflationary scenarios, and most of the time value stocks performed better than growth stocks in periods with elevated inflation. While nothing is absolute, this is a reminder that periods of elevated inflation aren’t necessarily detrimental to the overall stock market and your investments.
It’s important to understand how the market has historically performed to give our readers some context, but all the scary headlines and talking points are starting to take a toll on the U.S. consumer.
The University of Michigan publishes a monthly Consumer Sentiment Index to gauge the confidence consumers have in the economy, and its most recent release showed a “stunning” drop from December 2021 levels. It’s down to its lowest since October 2011. To put this in context, consumer confidence was higher during the heart of the COVID pandemic than it is now. Think about that!
These declines have been driven by the aforementioned scary headlines, rising inflation, reaction to governmental economic policies, rising gas prices, Russia/Ukraine tensions, and COVID fatigue. Sentiment can withstand most of these as stand-alone issues, but the accumulated anxiety of them all together weighs on consumers.
The bottom line is that while we don’t know exactly how long the current inflationary period will last, we do know that we can get through it by remaining mindful and taking some comfort in the fact that it isn’t permanent. At my firm, we continue to focus on investing in solid, blue-chip dividend-paying value stocks to help weather this inflationary environment. We believe that value should perform better than growth at elevated CPI levels which is where we are now!
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