Will Inflation Hurt Returns?

After eight months of steady gains in the stock market, volatility has once again returned to equities as Congress debates whether to pass two of the largest government spending bills in history - the $1.2 trillion Infrastructure bill and and the $3.5 trillion Build Back America Better bill.  These spending bills would be on top of the $1.9 trillion stimulus bill passed earlier this year.   

With current U.S. Government debt at $26.70 trillion, inflation at the highest levels in 30 years, and with over 11 million job vacancies in America, many economists worry that such government spending at this time is not warranted.  Such uncertainty over the fiscal direction of the Country will likely result in more stock market volatility in the short-term.  However, we believe global equities remain the best investment opportunity to grow wealth during inflationary periods and over the long term.

Will Inflation Hurt Stock Returns? 

Many of you have been asking if inflation will have a negative impact on stock market returns?  The good news is that history shows that stocks tend to outpace inflation over time.  For example, during 23 out of last 30 years, stocks have produced positive returns when adjusted for inflation.  If we go back all the way to 1926, the annualized inflation-adjusted return for US stocks is 7.3%.  

Financial Planning Sketch Art - Current Reality 

With the return of stock market volatility in recent weeks, it is easy for investors to make the behavioral mistake of letting their investments drive their financial goals instead of letting their plan to reach their financial goals determine their investments.  The sketch above illustrates the proven process for reaching your financial goals.  Once you set your financial goals (i.e., retirement), a financial plan will help you determine how to invest discretionary money to reach those financial goals.  Your odds of reaching your financial goals increase substantially when you let your financial plan determine how to allocate your money between stocks, bonds, and cash instead of making those decisions based on current events.

As always, please reach out if we can be of assistance! 

- Your DecisionPoint Financial Planning Team -