Stock Prices versus Implied Inflation

Eddy Elfenbein wrote a good post recently on the stock market versus inflation expectations.? When I read it, I said to myself, “Wait, is the relationship between nominal and real rates really 1:1, or is it more complex?”? Though it is not certain, the regressions that I ran indicated that 1:1 was not falsified by the data.? The regression:

Inflation expectations determined the much of the value of the S&P 500 for the last nine years.

And you can see the relationship here as well:

The short answer is “yes, inflation expectations have driven stock valuations for the last nine years.”

I’ve been spending time on issues like this for a variety of reasons, and I’ll try to explain them in the near term, but that’s all for now.

9 thoughts on “Stock Prices versus Implied Inflation

  1. Since we are well above the line at “you are here” perhaps this is another way to see oversold?

    1. Overbought, but I’m not sure how much confidence I would put into this as a timing tool — what the right timeframe would be for gauging periods of reversion or momentum.

  2. How does a value investor do “permanent asset allocation” differently then others? Would a value philosophy simply pick the stock portion differently?

Comments are closed.

Theme: Overlay by Kaira