A repost of reposts (here at Climateer Investing we recycle!), last seen January 18, 2022:
A threefer. The introduction to 2012's "The S&P/Inflation Expectations Correlation (SPY)":
A major caveat for investors trying to hedge inflation with equities: they aren't that correlated once inflation goes above 4% or so. 0-to-4% is the sweet spot. Above 4% you don't want services companies, manufacturers with tangible assets are the place to be.
This is one reason the Berlin market was able to approximate (with a 3-6 month lag) the Weimar hyper-inflation (the other being survivorship bias). The companies the historians track, the big brewers, metalworkers, miners had real assets.
Stocks of service companies without near-monopoly pricing power got crushed like any other long dated asset.
This is a point you won't see anywhere else, at least until the information contained in those dusty old German-language records gets translated....
And, one of my all-time favorite scatter-plots:
From "Crestmont Research on Inflation, P/E's and Market Returns":
Here's another way to look at the relationship between inflation and P/E's. Note that both the highest inflation and deflation rates correspond with the lowest multiples accorded the earnings:
...MORE
Finally, to reiterate:
A subject near and dear. The sweet spot for P/E ratios is 1.00- 2.00% annual CPI inflation. As you move away from that in either direction multiples drop off pretty fast, to the point that equities are not an optimal investment. You won't believe what the best investments for inflation in the 8-12% and greater than 100% ranges are. I'll write about them if we ever go Weimar....
....MORE
