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.
[...] Aleph Blog: Stock Prices Versus Implied Inflation [...]
[...] Inflation expectations driving stock prices? (The Aleph Blog) [...]
Since we are well above the line at “you are here” perhaps this is another way to see oversold?
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.
[...] The Aleph BlogHelping Institutions and Ordinary People Invest Better by Focusing on Risk ControlStock Prices versus Implied Inflation06JanPermanent Asset AllocationShort runIntermediateLong [...]
[...] expectations and real interest rates on two asset classes in the short run — gold and stocks. Tonight, I want to extend that two directions, to bonds and cash, and whether the effects [...]
[...] inflation expectations and real interest rates on two asset classes in the short run — gold and stocks. Tonight, I want to extend that two directions, to bonds and cash, and whether the effects [...]
How does a value investor do “permanent asset allocation” differently then others? Would a value philosophy simply pick the stock portion differently?
This comment was supposed to be in the permanent asset allocation blog.