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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.

1928-1970

1970-2013

For the last 20 years

1984-2013

and lastly, for the last 10 years

2004-2013

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).