How Does Inflation Historically Impact Stock Market Returns?

by | Sep 22, 2022 | Blog, Videos

In this week’s video Casey puts the historical stock market performance during rising and falling inflation periods into perspective for 2022 investors.

Everyone wants to know, when is inflation going to peak? When is it going to go back down again? Casey explains why that is the wrong question folks should be asking.

Instead, they should be asking, “how do I ensure I earn returns whenever it does go down?”

Show Notes

How Much Do Interest Rates Matter to the Stock Market? – Ben Carlson – A Wealth of Common Sense

Some Millennials Are Closing Investing Accounts Over Inflation – Kate Dore – CNBC

Mullooly Asset Podcasts

How Does Inflation Historically Impact Stock Market Returns? – Full Transcript

**Click here for a full downloadable PDF version of this video**

Casey Mullooly: In Episode 309, we talk about what it takes to earn returns in the stock market.

Welcome back to the Mullooly Asset Show. I’m your host, Casey Mullooly, back with you here for Episode 309. So unless you live under a rock, you’ve known that the two biggest themes so far this year have been inflation and the Fed’s response to inflation, which has been raising interest rates.

You can listen to pretty much any podcast we’ve done so far here in 2022 to hear about our thoughts and what we think about the Fed’s response and the overall environment as a whole. But CNBC did a survey recently with 900 investors through Ally Bank.

And the results found that one in five of these investors have closed an investing brokerage or trading account so far this year. That’s 20% of these people surveyed have closed their accounts completely, with 40% of them, two in five, citing inflation as the reason for closing this account.

This doesn’t sound like it’s people systematically saving for retirement or taking a longterm view with their investing dollars. This sounds more like people who had FOMO in 2021 and wanted to try their luck in the stock market and have learned their lesson the hard way. But the point being that 2022’s investing environment has people doing drastic things with their money.

So Ben Carlson, who blogs over at A Wealth of Common Sense, recently looked at just in a vacuum, what stocks do when inflation is rising versus what they do when it’s falling, and also what stocks do when interest rates are rising versus when they’re falling. And we know that investing in a vacuum isn’t the real world. There are a multitude of factors constantly affecting how people invest and where they put their money and the trades they make. There are unlimited number of factors that play into that decision. But it’s interesting, nonetheless.

So Ben found that when inflation is rising stocks, US stocks, this is going back to 1928, US stocks earn 5.5% per year average. When inflation is falling, they earn 14% per year on average. When interest rates are rising, stocks earn 9.7% per year, and when they’re falling, they’re 9.6%. So not much different on the rate side of the equation, but on the inflation side of the equation, wow, that is a pretty staggering difference.

So the question that we should be asking is, when is inflation going to peak? Ah, you almost got me there, but that is not the question that we should be asking. The question that we should be asking is, what does it take to earn that 14% return when inflation starts to eventually fall? To put this in 2022’s context, back in July we got a surprise inflation reading that was better than expected. For August’s reading, it was a surprise in the other direction and it was worse than expected.

So who’s to say which way September is going to go? Again, that’s not the question we should be asking. The question we should be asking is what it takes to earn those returns. And what it takes to earn those returns is staying invested and not closing down your brokerage account like this CNBC survey found. Past performance does not guarantee anything, but the only way for certain to earn the returns after rough stretches in the market is to remain invested, and by closing your account, you are guaranteed to not earn those returns.

So that’s going to wrap it up here for Episode 309 of the Mullooly Asset Show. Thank you as always for tuning in. We’ll be back with you next week for Episode 310.

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