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SPX: So You Think Inflation Will Bail You Out?

Stuart Allsopp profile picture
Stuart Allsopp


  • Even investors who are fundamentally bearish on the economy seem to have bought into the idea that rising inflation will allow stocks to post positive returns over the coming years.
  • History shows clearly that the positive direct impact of high inflation on nominal earnings tends to be more than offset by contracting valuation multiples.
  • The transition from low to high inflation has been associated with some of the worst returns in the history of U.S. stocks as the 1968 to 1982 period shows.
  • It would likely take over a decade of 10% inflation for the positive impact on profits to offset the negative impact of even a historically mild period of valuation mean reversion.

Money Printing 100 US Dollar Banknotes
Photo by Nerthuz/iStock via Getty Images

During every market bubble there has to be a reason why traditional valuation measures no longer matter, otherwise we would not get to such extreme levels. In this current bubble it is the belief that policymakers

This article was written by

Stuart Allsopp profile picture
I am a full-time investor and owner of Icon Economics - a macro research company focussed on providing contrarian investment ideas across FX, Equities, and Fixed Income based on Austrian economic theory. Formerly Head of Financial Markets at Fitch Solutions, I have 15 years of experience investing and analysing Asian and Global markets.

Analyst’s Disclosure: I am/we are short SPX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (17)

Angelmarauder profile picture
I would pair instead: High Inflation Stems From Economic Weakness And Creates Uncertainty For COMPANIES.

Companies tighten their belts and become leaner. Price uncertainty leads to wider safety margins. Current productivity and forward earnings expectations are damaged. If interest rates rise and affect the cost of debt, further dampening earnings.

The problem with trusting the bond market to have historically accurate predictions is that we are add an unprecedented point of monetary policy; we've had a spree of post-cold war interest rates following a straight line down from 10% down to zero. This has not been sustainably healthy. Deflationary pressures are huge and the Federal reserve has all its dials turn to full. Independently, this is manageable; but paired with Treasury, we are at a severe turning point...
Stuart Allsopp profile picture
@Angelmarauder Good point re companies. As for the bond market though i dont think the current period is unprecedented. The most dovish period of monetary policy on record was in 1947, when 10-year real yields were -17%. The SPX traded at a PE ratio roughly one third of current levels.
The real time period to look at is post WW2 when monetary and fiscal policy were very similarly aligned. You can see huge "transitory" inflation in the 40s that then subsided and spiked depending on the year. Given the economic deflationary trends now, there is a question mark on the sustainability of any super high transitory inflation.

History has shown us that investing in times like these are incredibly difficult (there is no one answer), as most wealthy individuals will end up quite behind in real terms over a period of 20 years. Those who have the right strategy will stay ahead. May the smartest win.
well if you want an extreme example of what can happen, look up the Caracas exchange returns from when Chavez got in (inflation took off) to 2020..the index went from about 19,000 to 2.25m in 20 years of inflation...currency was debased a lot more though
Stuart Allsopp profile picture
@KetchupChipsAreBest Thats true and cannot be ignored. This is why I own gold.
What about commodity equities, such as the oil industry or some mining stocks? They may outperform during inflation.
g.dimit profile picture
@Hockeyguy4unow Natural Resources doing well during Inflationary Periods, might be a year or two to reach consumer Level.
Stuart Allsopp profile picture
@Hockeyguy4unow Absolutely. I recommend XLE as well as EWU which has a large share of resource stocks.
@Stuart Allsopp I like XLE too, I recently double tapped the inflation exposure with calls on XME, the metals and miner sister fund. I'd rather have exposure to inflation / commodity assets and not need it than not have it and watch the train leave the station.
transition to high inflation produced a bear market bottom in December 1974 where DJIA was at same level as it was in 1962
@user 11202791 This is totally inaccurate. There was no sudden transition to high inflation in December 1974 "producing" a bear market bottom. Inflation and inflation expectations began rising in the 1960s. The transition from moderate to high inflation began in the early 1970s, gaining full traction in 1973 with the first oil shock, and the market plunged 40% from early 1973 to the end of 1974 because of this. Obviously there is going to a bottom somewhere. But the market continued to perform relatively poorly until August, 1982 about the time inflation and inflation expectations were finally brought under control thanks to Paul Volcker.
tomfrompv profile picture
@language police
Don't forget the Nixon debacle was also going on during that time. Its hard for a market to stay positive when the govt is in chaos.
Stuart Allsopp profile picture
@tomfrompv You seen what's going on in US politics currently?
Agree with the author's thesis. History shows that contraction of P/E will more than offset nominal increases. However, in the very short run, a sudden increase in inflation and inflation expectations, as is happening now, leads to a surge in demand, which may outweigh multiple contraction.
nuppal profile picture
@language police combined with the production from the currently unemployed??
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