Several articles published lately suggest that stocks perform well in higher inflation environments. That may be the case when inflation rises due to more robust rates of sustainable economic growth. However, history suggests sharply rising inflation not only negatively impacts economic growth but triggers adverse market environments.
Let’s start with the “bullish spin” from Dimensional Advisors. To wit:
“A look at equity performance in the past three decades does not show any reliable connection between periods of high (or low) inflation and US stock returns.
Since 1991, one-year returns on US stocks have fluctuated widely. Yet weak returns occurred when inflation was low in some periods, and 23 of the past 30 years saw positive returns even after adjusting for the impact of inflation. That was the case in the first six months of 2021, too (see Exhibit 1).”