Why Peak Inflation Matters For Stocks, Even More Than A Recession

Why Peak Inflation Matters For Stocks, Even More Than A Recession
Theodora Lee Joseph, CFA

about 1 year ago1 min

Mentioned in story

Prices all around you may be way higher compared to a year ago, but the question investors are trying to figure out is whether they’re likely to get higher still. Recent key inflation gauges for the US and Europe seem to suggest that inflation has peaked. While that alone is not enough for the Federal Reserve (the Fed) to ease up on the rate hikes it’s using to tamp down inflation, it is definitely a step in the right direction.

Getting to peak inflation is big for investors. It can provide some comfort that the Fed’s hiking cycle might be working, and therefore, hint at an end to the market selloff. Plus, it caps the downside risks that ever-increasing inflation poses to businesses and stocks. More importantly, it signals the potential for stock markets to bounce back. The S&P 500’s total returns since 1955 show just that. The market tends to see healthy returns between 10%-20% in the 12 months following an inflation peak (red, dark blue, and light blue lines) – that is, unless a recession follows (orange line).

While fears of a global recession may persist for good reason, it’s worth noting that investors are very likely to reverse a stock market drawdown all within a year post-peak-inflation. In short, while it may be nice to avoid a recession altogether, it’d be even better to have clarity of peak inflation. And, as China’s potential economic reopening presents the risk of new inflationary drivers, it’s possible we might not have that for some time.

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