In our investment research, we have studied inflation, its predecessors and impacts. We proposed various alternatives on how to protect ourselves or benefit from periods when inflation rates are high or expected. We have also studied the impact of inflation and deflation, their correlation across and between different asset classes since the 1900s, combined with interest rates, unemployment, GDP growth, market valuation and other factors over different periods of time.
Analysis highlights:
- The debt-to-GDP ratio historically reached the highest rates in most of the developed countries after interest rates reached zero. Central banks’ ability to influence the economy through monetary policy, as well as the ability of governments to stimulate it with fiscal policy, will be much more limited. Many advanced world economies are approaching an inflection point in the long-term debt cycle. Are we nearing a big reboot?
- Governments and central banks will probably act between the two opposite poles. The rules of the game change, the essence of the game itself remains unchanged. As for the stock market, it’s inflation – not raising interest rates that pose a risk to markets. We looked at the returns S&P 500 for 1928-2019 and found out how the stock market performed in different inflation scenarios.
- Disinflationary periods benefit the stock market, while rising inflation is considered a negative phenomenon. The economic boom combined with above-average inflation poses an increased risk to the stock market. What scenario are we approaching and what will be its effects?
