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Stocks and Inflation – An Interesting Indicator

By JLP | February 27, 2008

I saw this little tidbit of information regarding stocks and inflation in yesterday’s Ahead of the Tape column ($) in the Wall Street Journal:

Since 1952, the S&P 500 has gained just 0.2%, on average, in the year after the consumer-price index has grown by at least one percentage point more than its five-year moving average, according to a study by Ned Davis Research.

Currently, the CPI is outpacing its five-year average by 1.4 percentage point, says Tim Hayes, chief investment strategist at Ned Davis Research.

The price-to-earnings multiple for the S&P 500 expanded in the last three quarters of 2007 but has lately fallen to about 16 times last year’s earnings, far from its bubble peak of about 30. If inflation is here to stay, multiples could fall further.

I hate to be pessimistic, but I have a nagging feeling that inflation is here to stay thanks to high energy prices which are starting to impact the price of everything else. How inflation will impact today’s stock prices is anybody’s guess. If you’re a long-term investor, I wouldn’t spend a lot of time worrying about it.

Topics: Investing | 1 Comment »


One Response to “Stocks and Inflation – An Interesting Indicator”

  1. JimmyDaGeek Says:
    February 28th, 2008 at 9:20 am

    Because, deep down, most people think it is their American right to live their life as energy-ineffciently as they want, we are in a long haul with respect to energy prices.

    Even when people substitute energy-efficient devices, they tend to rationalize their usage and keep them on longer.

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