Stocks are Not an Inflation Hedge.

In Investment Returns on April 21, 2011 by CQCA

The chart above shows the S&P 500 and the CPI, indexed to their 1970 rate. During the 1970s, the lowest increase in the CPI was 3.3% in 1971. Both 1974 and 1979 saw CPI rates over 12%.

A common misperception is that stocks appreciate with inflation. From the beginning of 1970 to the end of 1979, the S&P 500 increased 27%. During the same time, the CPI doubled. If the S&P 500 return was annualized (equation: (1.27^.1) -1 =?), it would have increased at a rate of about 2.4% every year. That is lower than any of the CPI rates throughout the decade.

If an investor put $100 into the stock market in 1970, and then waited until 1979, that $100 would have turned into $127. However, a product that cost $1.00 in 1970 would cost $2.00 in 1979, so the investor has more Dollars, but less wealth. Remember that the next time policy makers indicate that inflation will boost the stock market.

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