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.