O’Shaughnessy Asset Management examines how inflation regimes shape the relative performance of U.S. stocks and bonds over more than a century. The paper highlights that equities tend to outperform bonds in most inflation environments, though outcomes vary widely. It also challenges the assumption that low inflation is always best for stocks.
The Great Inflation, Factors, And Stock Returns
O’Shaughnessy Asset Management
Ehren Stanhope
Research
16 Pages
Key Takeaways
High Inflation Hurts Bonds: Bonds delivered positive real returns in only 6 of 20 high inflation years, with average real losses of -2.84%, while stocks gained 2.51% on average.
Moderate Inflation Sweet Spot: Stocks produced positive real returns in 36 of 46 years (78.2%), with average gains of 11.14%, compared to bonds at 3.58%.
Low Inflation Not Ideal: Stocks returned just 5.92% on average and were positive only 58% of the time, versus bonds returning 4.47% with a 74% success rate.
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