How do equities go amid inflation?

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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.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.