In the late 1960s, company sales and earnings were rising, and stocks were on a tear. But, so was inflation. Yet no one adjusted for the dollar value shrinkage. And now that history is repeating.
You cannot win if you cannot beat inflation
In inflationary times, the financial system is swimming upstream. In the past 18 months since the stock market peaked, inflation’s “return” has been 8% (using the core CPI). In other words, to regain the December 2021 highpoint, the stock market must rise 8% above that previous level. Instead, it is still well below that mark.
Here are five graphs that show the underperformance is widespread – from poor to worse.
Note – Rather than adjust the index and stock prices for inflation, the December 2021 level (0%) was increased by the inflation rate. (That’s the upper red line.)
1. The S&P 500 versus the bond market and REITs (all results include reinvested income payments)…
2. The three major U.S. stock market indexes (these index results, and the following ones, are as reported, excluding dividend payments)…
3. The S&P 500 versus its allocations to growth stocks and value stocks…
4. The S&P 500 versus the S&P 400 (mid-sized companies) and the S&P 600 (small-sized companies)
5. The popular FAANG stocks…
The bottom line – There is no “new” bull market yet
While the stock market has risen recently, companies and investors continue to struggle in this inflationary environment.
Companies are working hard to control costs and raise selling prices to produce earnings growth or, at a minimum, stability. On the financial side, higher interest rates mean many companies are dealing with low interest rate debt that will mature in the near future.
As to stock price valuations, those higher interest rates adversely enlarge the discounting of future expected growth.
Additionally, those higher interest rates have produced clearly attractive alternatives to stock and other risky investments. With the Fed-created memories of 0% (nothing!) income from safe shorter-term securities and money market funds, today’s 5+% levels look special and highly desirable to investors. No longer is undesirable risk necessary for a paltry income.
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