You’ve all heard the stories about houses selling in hours with multiple bids above asking prices. Our realtor called and tried to entice us to sell – she thought we could get double what we paid for the house as recently as 2018. A dear friend of mine, an antique train toy collector, just participated in an auction where he agreed to be the top bidder; he did not attend the auction: He paid seven times what he anticipated. Car dealers cannot find enough big trucks. Art and collectibles, refer to the last newsletter, are paying prices unheard of. It seems a little out of control, from my perspective.
The better question may be what happens to stock prices during periods of high inflation? And, what is significant inflation?
Those of you consuming during the years 1966 – 1983 may remember: The inflation rate climbed from 1.6% in 1965 to over 13.5% by 1980. This period possibly qualifies as significant inflation. It settled back to 3% by 1983: stock prices meandered around a 2.6% annualized rate of return during this period.
In 1983 inflation began to recede: Mr. Volker, brought on By Jimmy Carter, raised interest rates significantly; I remember money market rates around 17%, effectively killing inflation. Inflation today, according to The Bureau of Economic Data, stands at 2.3%. The annualized return rate of stocks from closing prices in 1983 through yesterday’s close is around 9%: over three times higher when compared to the 1963-1983 period.
Estimates of future inflation are basing around 2.5%. Earnings growth, according to S&P Indices, a division of McGraw Hill, is estimated to grow by over 50% from the period ending 12/31/2020 to 2021. And are expected to increase again by over 12% going into 2022.
We believe the probability for lower than average inflation coupled with higher than average corporate earnings bodes well for U.S. Equities.
We are staying put; we like the house.
Carlos Dominguez – CERTIFIED FINANCIAL PLANNER™, Portfolio Manager, RJFS
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Image:©MAKSYM YEMELYANOV – STOCK.ADOBE.COM
Inflation data: https://www.macrotrends.net/
Stock Prices: http://www.econ.yale.edu/~shiller/data.htm
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