If we compare the historical performance of S&P 500 vs the historical U.S inflation rate, this is what we can observe.
During the Great Inflation period from 1965 – 1982, whenever the inflation rate peaks, the stock market is usually near the bottom. So if the inflation rate really peaks at 9.1% in June this year, could we be near the stock market bottom?
No one can give a definite answer to that but this chart tells us that we don’t have to wait until the CPI data comes down to a low digit before we see the stock market recovering.
If you are an investor with a longer term investment horizon, then the current market volatility may be a good opportunity to buy more shares of the good businesses or to invest into the S&P 500 for those who prefer the broad based index.
This is also part of our Moneyball investing methodology that we talk about at TJI to be buying great businesses at depressed prices due to them being temporarily out of favour. In the short term, some of these businesses’ earnings may be slightly impacted in 1 or 2 quarters but they are the ones with strong financials to eventually tide through the tumultuous economic environment, whether is it inflation or recession.
If you want to learn more on how you can make better analysis of the stock markets, you may check out our upcoming workshops here.