Financial Planning Fridays #40 What Has Lower Inflation Meant for Stocks?

We are now very close to repeating an economic milestone that has historically led to excellent market returns for stocks.

The Consumer Price Index fell from 9.1% to 4.9% since July 2022—a decline of 4.2% —and it is expected to continue to fall until July 2023. The Consumer Price Index or CPI is a measure of the average change over time in the prices paid by consumers for a basket of goods and services.

The basket that makes up the CPI index looks like this:

It includes things like housing, food, energy, healthcare, and transportation that represent how much Americans are paying for goods and services. It is widely used as a gauge of inflation and is used by the Federal Reserve to set monetary policy.

This chart from Bespoke Investment Group shows the performance of the S&P 500 for one, three, six and 12 months after every five-percentage point decline in CPI over 12 months since 1940.

This would be the 7th time this has happened. In the six other instances, the S&P 500 has always been positive six months afterwards with an average median return of 13.52%!

One year later, the S&P 500 has also been positive five of the previous six times with an average median return of 14.94%.

This is yet another positive historical example in our growing list for 2023 and another reason why we remain optimistic about the market.

It is important to note that although the six-month median return in each of these previous scenarios was excellent, this does not mean that the market simply went straight up. There were many ups and downs along the way that the prepared investor, like our clients, can continue to benefit from.

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