GaveKal asks the quadrillion dollar question today. How do stock markets perform in inflationary environments?
Despite a roiling US bond market sell-off, equity investors had until Thursday taken comfort from the Federal Reserve saying it will stay easy for longer and, hey, what’s not to like about a “little” inflation? The idea of this paper is to test the notion that limited inflation can, in fact, benefit stocks.
To that end, let’s separate long-run US stock market returns into two clusters: the first will show returns in periods of structural disinflation (or deflation) and the second, returns in periods of structural inflation. The point of this exercise is to test if these two separate clusters show a statistically significant difference, as measured by equity returns over cash.