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Take advantage of SignalTrend's Inflation Forecast. Just click "More" on the far right side of the navigation bar
near the top of the page. Then select "Inflation Forecast".
Be tenacious in your insistence that politicians implement anti-inflationary policies. What good is it to make a 12%
return, if inflation is 10%? After a 25% capital gains tax on the nominal 12% return, you'll retain only 9% of the gain in
after tax dollars. The result is a 1% inflation-adjusted loss (9% - 10% = -1%). Better still, write your congressman
and express your opposition to taxes on phantom profits! Demand that taxes be calculated on inflation-adjusted
returns rather than nominal returns.
When planning for retirement, focus on the inflation-adjusted, after-tax return rather than the pretax nominal return. It
is more pleasant to reflect on the pretax return but the inflation-adjusted, after-tax return represents true financial
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|Is Inflation or Deflation Better for the Stock Market?
Proprietary Graphs, Tables and Analyses - All Rights Reserved
● Moderate deflation has accompanied the best stock market returns (16.2%).
● Periods of extreme Inflation have produced the worst returns (-31%).
● Inflation or deflation greater than 5% has accompanied poor stock market returns.
|DJIA Nominal Return (Avg.)
Inflation, deflation, nominal DJIA returns and real DJIA returns were calculated for each of the 12 month periods
from 1922 through 2006. The results were grouped according to the severity of inflation or deflation. For example,
the first column shows stock market returns during periods which experienced deflation greater than 5%. The DJIA
averaged a 31% loss during such periods. The average deflation during such periods was 9%. After adjusting for
deflation, the average real return during those periods was a 22% loss.
Deflation is almost universally considered an evil to be avoided at all costs. Politicians, governments, corporations
and the media warn that declining prices are bad for you. They often use the great depression of the 1930's as an
example. Deflation is bad for debtors. But the table above shows that investors have profited most during periods
of moderate deflation.
The bottom row shows that the best real returns (16.2%) occurred during periods of moderate deflation (herein
defined as deflation occurring at rates between 0 and 5%). Rates of deflation exceeding 5% were disastrous for
the stock market, producing an average DJIA real return of -22%. Periods of moderate inflation produced a 9%
real return. Periods of severe inflation (5-10%) experienced a 3% real loss. Periods of excessive and extreme
inflation produced real losses of 16% and 31% respectively. The nominal returns on the third row reflect the same
trends even before adjusting for inflation and deflation.
Mechanics / Details
This paragraph is for those who want a very detailed mathematical explanation. If you are not one of those, do
yourself a favor and skip to the next paragraph. Rolling 12 Month Periods were used for all calculations. During the
84 years from 1922 through 2006 there were 1008 complete rolling 12 month periods. The oldest monthly inflation
figure available from the Bureau of Labor Statistics was February, 1922. So, February, 1922, through January
1923 was the first 12 month period. March, 1922, through February, 1923 was the second 12 month period. April,
1922, through March, 1923 was the third 12 month period... and so on. The last rolling 12 month period was
January, 2006, through December, 2006. The sample size for each category is as follows: Severe Deflation: 32 ,
Moderate Deflation: 100 , Moderate Inflation: 654 , Severe Inflation: 152 , Excessive Inflation: 62 and Extreme
Inflation: 8. Total: 1008. For example, there were 32 complete rolling 12 month periods from 1922 through 2006
which experienced severe deflation (first column in the table above).
DJIA Nominal Return: Percentage gain or loss in the Dow Jones Industrials, excluding dividends.
DJIA Real Return: Percentage gain or loss in the Dow Jones Industrials, adjusted for inflation or deflation.
Dividends are excluded. Inflation example: A 5% stock return over a period that experienced 11% inflation results
in a -6% real return (5% - 11% = -6%). The investment lost more purchasing power through inflation than it gained
through appreciation. Deflation example: A 5% stock return over a period that experienced 11% deflation results
in a 16% real return (5% + 11% = 16%). The investment gained more purchasing power through deflation than it
gained through appreciation
Time period: 1922-2006. Source of inflation & deflation Data: Monthly Consumer Price Index for All Urban
Consumers: All Items, Not Seasonally Adjusted, U.S. Department of Labor: Bureau of Labor Statistics.
|Inflation (Deflation) (Avg.)