Rhymes of History
To our clients and associates,
The market continued its volatility this week on news that inflation had fallen year over year less than market expectations. Over the past three inflation reports we have seen the following trajectory in annual inflation: 9.1%, 8.5%, 8.3%. The 9.1% reading is the current high of the cycle.
This got me thinking; what has the market returned on average from peak inflation to the following trough inflation when the peak inflation amount was over 7%?
As it turns out, we have had five periods that meet this criteria after 1940: The Post-WWII Inflation Boom of the late 40s, Cold War tensions of the early 50s, two bouts of inflation in the mid-70’s and early 80’s dubbed the Great Inflationary period, and right now.
The four previously completed periods above all shared some common traits:
- On average the Dow was down one year prior to peak inflation.
- After Inflation peaked, unemployment rose.
- With the benefit of history, all these periods were later defined as recessions.
- Here is the surprise: The Dow earned over 12.5% per year during these periods. This does not include the added benefit of dividends (I simply don’t have access to the data for the 40s period with dividends, but it would likely add 1 to 3% per year to the number shared above).
The interesting thing is the poor economic data in the above periods lead to lower inflationary pressures. Lower inflationary pressures allow for more people to purchase more goods and services leading to renewed economic growth. That economic growth has been associated with strong market returns historically.
So where are we in this pattern at this time?
- The market has been down over a one-year period
- Inflation peaked in June and the unemployment rate has started to tick up.
- Much of the market chatter is now debating whether we are currently in a recession.
Of course, I wish I could tell you the go-forward market return. Only through the fullness of time will we know when a market bottom has occurred or whether inflation peaked and if we are in a recession. The future is inherently unpredictable. As Mark Twain once said, “History never repeats itself, but it does often rhyme.” Rhyming with history here would suggest cautious optimism and staying invested.
We understand the uneasiness that market volatility can cause and will continue to keep you abreast of market developments.
Wishing you well,
Past performance is not indicative of future performance. Loss of principal and/or loss of portfolio value are possible.