Inflation Impact on the S&P 500 Through History

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With trillions of dollars printed to support the economy during Covid, it’s not a surprise that inflation has spiked significantly in the months following. However, the extent of how much inflation rose during this time was surprising. As of April 22′, monthly inflation is currently at 8.3% in the US.

What I wanted to understand was whether this scenario happened in the past and how did inflation impact stock market returns in those years.

The Great Inflation

At first glance, this happened during the 1960s and continued to spike until the recovery starting the 1980s. This period was also called “The Great Inflation“.

This inflationary period was due to Fed policies, the abandonment of the gold window, Keynesian economic policy, and market psychology. In turn, interest rates rose to nearly 20%.

Inflation: 1972 to 1976

During the first spike in inflation between 1972 to 1976, inflation spiked to 11% in 1974. The market dropped 24% in these 2 years but recovered shortly in 1976.

Inflation: 1976 to 1983

Inflation had a second spike to 13% between 1976 to 1983. To my surprise, this time stocks had a slight dip by 5% between the first 2 years of the interest rates rebounding upwards. At the interest rate peak of 1980, the market has increased by 16% from 1976. The market continued to recover with a huge spike upwards in 1983, with corresponded with the drop in interest rates.

The market during times of high inflation looks to be highly driven by market psychology. The first knee jerk reaction with a 25% correction (only annualized returns). If we looked at the daily close prices, the peak to valley was actually a 50% drop in 1973.

As a summary, the market traded relatively flat until inflation was back in control. It took a decade for the market to recover.

Current Day: May 2022

From looking at monthly inflation data, as long as the fed continues to increase interest rates, inflation is slowly tapering off. March 22′ was the peak at 8.54% and inflation has dropped to 8.26% in April 22′. The market has only corrected 16% thus far. If inflation continues to increase or remain it’s course, history tells us the market could continue to drop >30% more.

This is a very simplistic view only comparing 2 variables and forecasting market conditions is never that simple. I’ll continue to look into the interest rate policies during these times to see how the fed as reacted in the past and how is it different this time around.

Also, the market looks extremely overvalued in it’s current state and I can’t speak to how overvalued the market was during 1973. Even with dropping inflation, the market could continue to self-correct over the next few years. This is another analysis in the works so stay tuned for more analysis on the S&P 500.


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