This question seems to pop up in online forums all the time. Are equities or stocks a good hedge during high inflationary times? According to the data of S&P 500 returns and historical inflation data, I have constructed a table comparing the two side by side.
| Year | S&P Returns | Inflation Rate | Gold Price |
| 1926 | 11.62 | 1.1 | 20.67 |
| 1927 | 37.49 | -1.7 | 20.67 |
| 1928 | 43.61 | -1.7 | 20.67 |
| 1929 | -8.42 | 0.0 | 20.67 |
| 1930 | -24.9 | -2.3 | 20.67 |
| 1931 | -43.34 | -9.0 | |
| 1932 | -8.19 | -9.9 | |
| 1933 | 53.99 | -5.1 | |
| 1934 | -1.44 | 3.1 | |
| 1935 | 47.67 | 2.2 | |
| 1936 | 33.92 | 1.5 | |
| 1937 | -35.03 | 3.6 | |
| 1938 | 31.12 | -2.1 | |
| 1930 | -0.41 | -1.4 | |
| 1940 | -9.78 | 0.7 | |
| 1941 | -11.59 | 5.0 | |
| 1942 | 20.34 | 10.9 | |
| 1943 | 25.90 | 6.1 | |
| 1944 | 19.75 | 1.7 | |
| 1945 | 36.44 | 2.3 | |
| 1946 | -8.07 | 8.03 | |
| 1947 | 5.71 | 8.03 | |
| 1948 | 5.50 | 8.1 | |
| 1949 | 18.79 | -1.2 | |
| 1950 | 31.71 | 1.3 | |
| 1951 | 24.02 | 7.9 | |
| 1952 | 18.37 | 1.9 | |
| 1953 | -0.99 | 0.8 | |
| 1954 | 52.62 | 0.7 | |
| 1955 | 31.56 | -0.4 | |
| 1956 | 6.56 | 1.5 | |
| 1957 | -10.78 | 3.3 | |
| 1958 | 43.36 | 2.8 | |
| 1959 | 11.96 | 0.7 | |
| 1960 | 0.47 | 1.7 | |
| 1961 | 26.89 | 1.0 | |
| 1962 | -8.73 | 1.0 | |
| 1963 | 22.80 | 1.3 | |
| 1964 | 16.48 | 1.3 | |
| 1965 | 12.45 | 1.6 | |
| 1966 | -10.06 | 2.9 | |
| 1967 | 23.98 | 3.1 | |
| 1968 | 11.06 | 4.2 | |
| 1969 | -8.5 | 5.5 | |
| 1970 | 4.01 | 5.7 | |
| 1971 | 14.31 | 4.4 | |
| 1972 | 18.98 | 3.2 | |
| 1973 | -14.66 | 6.2 | |
| 1974 | -26.47 | 11.0 | |
| 1975 | 37.2 | 9.1 | |
| 1976 | 23.84 | 5.8 | |
| 1977 | -7.18 | 6.5 | |
| 1978 | 6.56 | 7.6 | |
| 1979 | 18.44 | 11.3 | |
| 1980 | 32.50 | 13.5 | |
| 1981 | -4.92 | 10.3 | |
| 1982 | 21.55 | 6.2 | |
| 1983 | 22.56 | 3.2 | |
| 1984 | 6.27 | 4.3 | |
| 1985 | 31.73 | 3.6 | |
| 1986 | 18.67 | 1.9 | |
| 1987 | 5.25 | 3.6 | |
| 1988 | 16.61 | 4.1 | |
| 1989 | 31.69 | 4.8 | |
| 1990 | -3.11 | 5.4 | |
| 1991 | 30.47 | 4.2 | |
| 1992 | 7.62 | 3.0 | |
| 1993 | 10.08 | 3.0 | |
| 1994 | 1.32 | 2.6 | |
| 1995 | 37.58 | 2.8 | |
| 1996 | 22.96 | 3.0 | |
| 1997 | 33.36 | 2.3 | |
| 1998 | 28.58 | 1.6 | |
| 1999 | 21.04 | 2.2 | |
| 2000 | -9.11 | 3.4 | |
| 2001 | -11.89 | 2.8 | |
| 2002 | -22.10 | 1.6 | |
| 2003 | 28.68 | 2.3 | |
| 2004 | 10.88 | 2.7 | |
| 2005 | -4.91 | 3.4 | |
| 2006 | 15.79 | 3.2 | |
| 2007 | 5.49 | 2.8 | |
| 2008 | -37.00 | 3.8 | |
| 2009 | 26.46 | -0.4 | |
| 2010 | 15.06 | 1.6 | |
| 2011 | 2.11 | 3.2 | |
| 2012 | 16.00 | 2.1 | |
| 2013 | 29.6 | 1.5 |
Legend:
S&P Green: 30% or higher returns
S&P Red: -20% or worse returns
Inflation Green: Any deflation (negative inflation)
Inflation Red: 10%+ inflation (high inflation)
Analysis: Although stocks are overall a much better investment than other asset classes, it does fluctuate very wildly and doesn’t seem to correlate with inflation very much. For example look at year 1974. S&P500 had -26.47% and to add to the pain, inflation was another 11%. So that year, you actually lost 37% as an investor! On the other hand, during 1931, S%P500 gained an impressive 53.99% and the icing on the cake is that inflation was at -9%!
Below are examples of great returns made sweeter because of negative inflation:
| Year | S&P Return | Inflation | Real Return |
| 1927 | 37.49 | -1.7 | 39.19 |
| 1928 | 43.61 | -1.7 | 45.31 |
| 1933 | 53.99 | -5.1 | 59.09 |
| 1938 | 31.12 | -2.1 | 33.22 |
| 1949 | 18.79 | -1.2 | 19.99 |
| 1955 | 31.56 | -0.4 | 31.96 |
And of course, on the other end of the spectrum, is a table of crashes made more painful because of high inflation:
| Year | S&P Return | Inflation | Real Return |
| 1941 | -11.59 | 5.0 | -16.59 |
| 1946 | -8.07 | 8.03 | -16.1 |
| 1973 | -14.66 | 6.2 | -20.86 |
| 1974 | -26.47 | 11.0 | -37.47 |
| 1981 | -4.92 | 10.3 | -15.22 |
| 2008 | -37.00 | 3.8 | -40.8 |
However, there are a few instances where stock gains and inflation have “hedged” each other. For example, in 1931, stock losses were in 43% range, but that was partially mitigated by the fact that inflation was -9% as well. In 1980, stocks had an impressive 32.5% run but cooled by the 13.5% inflation.
| Year | S&P Return | Inflation | Real Return |
| 1931 | -43.34 | -9.0 | -34.34 |
| 1932 | -8.19 | -9.9 | 1.71 |
| 1942 | 20.34 | 10.09 | 10.25 |
| 1951 | 24.02 | 7.9 | 16.12 |
| 1979 | 18.44 | 11.3 | 7.14 |
| 1980 | 32.50 | 13.5 | 19 |
Conclusion: If you were to correlate annual S&P 500 returns with annual inflation, then no, there is hardly any correlation. However, since S&P 500 has a long term return of 10% and inflation has historically been 3%, then yes, stocks are a good overall “investment”, but not a good “hedge”.
Even though S&P500 averages out to 9-10% per year over the long run, it rarely produces that number. What I’ve learned so far with the stock market is that when it rains, it really pours. An earnings hiccup or a chip in the economy turns into crazy sell-off. An earnings beat or small signs of recovery turns into a crazy cash influx.
Sources:
http://www.onlygold.com/TutorialPages/Prices200yrsFS.htm
http://www.istockanalyst.com/article/viewarticle/articleid/2803347