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Inflation Determines Market Performance? Historical Stats Say No.

With some recent inspiration from Anastis (a good friend of mine), I've decided to look at the relationship between inflation and S&P 500 (market) returns.

Below is the regression statistics generated when I put inflation and S&P 500 returns together on excel. Notice that the Adjusted R Square is negative. With R Square being so low, the regression analysis states that it is most likely better to just assume a horizontal line when comparing inflation with S&P 500 returns since 1928.

The correlation between SPY and Inflation rates from 1928-2013 has been .003161. Low, but positive (so relatively flat).

Now I break up the regression in half and run a regression into a former and latter half.



For the last 20 years


and lastly, for the last 10 years


Although what it looks like is that inflation is starting to have an impact of expected market performance, R-squared still tells us that it is unpredictable (inflation only explains 48% of the variability of market returns, or better yet 41% of market returns given adjusted R Square).