Short and Sweet

Beware the new mantra that stocks are a good inflation hedge

“So, to be clear, this April really was cruel,” writes John Authers in his regular Bloomberg column, “In terms of the basic economic numbers that affect us most, it was the cruelest month for the U.S. in many decades. It was only one month. It is way too soon to proclaim the beginning or end of a major economic trend, on the base of the data we have so far. But April’s data were not only very, very bad, but also very, very surprising. They need to be confronted and understood.” Authers is surprised at the markets’ muted reaction to “a bad unemployment number followed by a bad inflation number.” He warns that if inflation does take root, stocks have plenty of room to fall further.

The chart below shows what happened in the 1970s once investors realized that inflation was not “transitory” but entrenched instead. Stocks drifted sideways for most of the decade, managing only a 4.78% gain. Gold, on the other hand, gained 1592%. We sometimes overlook the fact that stocks peaked in the late 1960s, just before the inflation began. Nearly twenty years of sideways to down action followed. Stocks started and ended the 1970s at 1000 while runaway inflation raged.

Gold and Stocks
(In percent, 1970-1979)

overlay line chart showing the returns on gold and stocks during the 1970s

Chart courtesy of • • • Click to enlarge

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