Inflation is on the rise. Yesterday’s CPI reading saw inflation rise 2.8% year-over-year.
Rising inflation is mostly a function of a rising year-over-year change in oil
Bearish investors and traders are afraid that rising inflation will kill the bull market in stocks. I disagree.
- Inflation is not high right now.
- History shows that rising inflation is not consistently bearish for the stock market. Stagflation is bearish, not inflation. Rising inflation is normal when the economy is growing. There are no significant signs of economic deterioration (stagflation) right now.
January 2015 – February 2017
July 2009 – September 2011
October 2006 – July 2008
June 2002 – September 2005
March 1998 – March 2000
December 1986 – October 1990
December 1976 – March 1980
August 1972 – November 1974
April 1959 – February 1970
June 1955 – April 1957
August 1949 – April 1951
The stock market generally trends higher as inflation rises. However, rising inflation does cause the stock market’s volatility to increase (i.e. multiple corrections along the way).
Inflation causes corporate costs to rise. But it also causes corporate revenues to rise, which means that inflation doesn’t have a significant impact on real (inflation adjusted) corporate earnings.
*We are looking at the nominal value of stock prices.
Ultimately it’s stagflation that kills bull markets in stocks. There are no signs of significant economic deterioration right now, but we are on the lookout.
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