Mapping bond and equity returns in historic inflation regimes
Investment returns are highly sensitive to inflation. While the effects are more direct on bonds, equities are affected too, despite the flexibility that corporations have to react to inflationary environments.
This colourful scatterplot visualises historic US investment returns in eras of high or low inflation – choosing 5 percent CPI growth as the threshold. Plotting every calendar year going back more than a century, we charted whether returns for the S&P 500 and 10-year government bonds were positive or negative. This results in four quadrants.
Red dots indicate the high-inflation years.
Using these quadrants, one correlation is obvious: most years with negative returns for both government bonds and equities have corresponded to years of high inflation.
The dotted diagonal line separates years where equities did better than bonds and vice versa. There are more years of equity outperformance, as the conventional wisdom would suggest.
With inflation remaining stubbornly high so far in 2023, we’re near the dead centre of this chart.