Tariffs and Stagflation
For investors concerned about the possibility of rising inflation and economic contraction, the historical data offers reasons for optimism.
One of the concerns arising from tariff talks is the possibility of stagflation, or the combination of rising inflation and an economic contraction. But should investors act on this concern with their investments?
Since 1930, the US has seen 12 years when negative GDP growth coincided with positive changes in the consumer price index (CPI). The US stock market’s real return—its return in excess of inflation—was positive in nine out of those 12. That hit rate is close to the frequency of positive real returns across all years between 1930 and 2024, which is 68%.
This is another example demonstrating how concerns over the economy shouldn’t drive portfolio decisions. Predictions about the direction of the economy are continuously forming, but the market itself remains the best predictor of the future. That means market prices are set to levels to deliver positive expected returns even amid concerns over future economic outcomes.
EXHIBIT 1
Annual Inflation, GDP Growth, and Real S&P 500 Index Returns
1930–2024
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RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
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