Hey trader,
We got a couple of red-hot inflation reports last week. That has plenty of investors worried about owning stocks during high inflation.
Odds of a Fed rate hike at the October 28 meeting collapsed anyway. Investors still figure rising prices will eat their returns alive.
Six decades of history says stocks during high inflation hold up just fine.
The S&P 500 has climbed through every long stretch of hot inflation since the mid-1960s, including the one we’re living through now.
There’s a catch…
The speed of inflation matters far more than the level.
That difference is driving the violent rotation between tech and energy right now. It also tells you when to lean on stocks and when to lean on commodities.
The numbers make the case better than any opinion could.
What Happened To Stocks During High Inflation
The Fed’s official inflation target is 2%. Since the mid-1960s, consumer price inflation has stayed above that level for 60 or more consecutive months three separate times.
Stocks compounded meaningfully in nominal terms through all three. Nominal just means the raw price gains before you adjust for inflation.
Here’s what each of those stretches looked like for stocks during high inflation:
- February 1966 through March 1986 (242 months) covered the Great Inflation, oil shocks, and aggressive monetary tightening. The index took significant hits along the way. It still trended higher.
- February 1987 through October 1997 (129 months) saw inflation hold above 2% for much of the late-1980s and 1990s expansion. Stocks rose substantially.
- March 2021 through September 2026 (66 months at the time of the data) has also coincided with continued gains. That includes the recovery from the sharp 2022 sell-off.
The years between those stretches produced strong rallies too. Stocks have moved higher with inflation running hot and with inflation running cool.
The market adapts. New companies go public. Weak companies go bankrupt.
It’s financial Darwinism at its finest. That constant turnover helps explain why stocks during high inflation keep finding a way higher.
Inflation above 2% hasn’t blocked long-run equity gains on its own. The inflation rate by itself tells you remarkably little about long-run stock returns.
When High Inflation Actually Hurts Stocks
Stocks during high inflation still don’t get a free pass. Inflation shocks can produce sharp volatility in the near term.
The year 2022 showed how ugly that gets.
Inflation peaked above 9%. The S&P 500 fell roughly 18%.
A drawdown like that feels miserable while you’re in it. It also sits inside the current high-inflation stretch, which has kept producing gains since.
Drawdowns come with owning stocks during high inflation. I treat them as part of the deal rather than a reason to bail.
Speed separates a healthy inflation regime from a dangerous one. When inflationary pressure accelerates out of control, it creates turbulence.
That’s the environment where you want to own commodities. When inflation settles down, there’s no better place to be than stocks.
Tech Stocks During High Inflation
In the near term, it’s all about rotations. They’ve been violent, no doubt.
Tech just saw another tremendous flush, with rumors swirling about another leveraged fund blowing up. I suspect leverage is a big reason equities have stayed range-bound for so long.
Too much leveraged money is chasing every single market swing. Under the surface, two sectors have still pulled ahead of the pack.
Tech and energy have been the strongest sectors over the past year. That’s no coincidence.
Energy is the commodity side of that leadership. It sits squarely on the right side of hot inflation.
Tech sits on the other side. Persistent inflation tends to keep interest rates elevated.
Higher rates pressure the valuations of growth stocks. That puts tech stocks during high inflation in a tougher spot than energy.
If this inflation keeps up, it’s going to cause problems for tech. The leader of the past year could quickly become the laggard.
Here’s how I’d put this to work. Stop treating every hot CPI print as a signal to dump stocks.
History shows stocks during high inflation can keep the long-term uptrend intact. Watch the direction of inflation instead of the headline number.
If it’s accelerating, commodities deserve a bigger share of your portfolio. If it’s cooling off, stocks are where you want to be.
Then take a hard look at your tech exposure this weekend. Persistent inflation is the biggest threat to its leadership.
Positions matter more than opinions. Make sure your plan for stocks during high inflation matches the regime you’re actually in.
Talk soon,
Gianni Di Poce
