Will Inflation Hurt Stock Returns? Not Necessarily.

Investors may wonder whether stock returns will suffer if inflation keeps rising. Here’s some good news: Inflation isn’t necessarily bad news for stocks.

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 1993, one-year returns on US stocks have fluctuated widely. Stock returns can be strong, or weak, or in between when inflation is high. For example, returns were relatively strong in 2021 but poor in 2022. Twenty-two of the past 30 years saw positive returns even after adjusting for the impact of inflation (see Exhibit 1).

**Past performance is no guarantee of future results.**
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Over the period charted, the S&P 500 posted an average annualized return of 7.0% after adjusting for inflation. Going all the way back to 1926, the annualized inflation-adjusted return on stocks was also 7.0%.

History shows that stocks tend to outpace inflation over the long term—a valuable reminder for investors concerned that today’s rising prices will make it harder to reach their financial goals.

1. Real returns illustrate the effect of inflation on an investment return and are calculated using the following method: [(1 + nominal

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2. Based on nonseasonally adjusted 12-month percentage change in Consumer Price Index for All Urban Consumers (CPI-U). Source:

US Bureau of Labor Statistics.

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Ryan Cole, CFP®November 29, 2023Comment