Moderate inflation: stocks stronger than bonds?

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GUEST EXPERT. In the United States, in the past, for each period where inflation has been moderate, i.e. between 1% and 4%, stocks have had higher annualized returns than bonds.

Annualized returns for each period. If a period was 12 months or less, the period’s returns were taken.
Returns from June 2023 to May 2024 were calculated with data as of May 28, 2024.

After reaching 8.93% in June 2022, the highest level in 41 years, the inflation rate has, following restrictive monetary policy, fallen significantly to 3.40% in April 2024. Which however, is still higher than the objective of the American Federal Reserve (Fed), which is 2%.


Against all expectations, if monetary policy had a positive effect on the inflation rate, economic growth behaved surprisingly well considering that history has shown that substantial increases in interest rates have created recessions that generally began within 18 months of the start of increases in the key interest rate (“Fed funds”).

However, this time, 24 months after the start of the key interest rate increases (March 2022), still no recession, and the real growth estimates for the second quarter of 2024 are around 3.4%, and those for the whole of 2024 range from 1.5% (OECD) to 2.7% (Fed).


So, if all this comes true, no overheating, no recession.

Could the Fed – which was criticized in 2020 for being behind inflation – have achieved a formidable feat by reducing inflation without creating a recession?

Normally, the Fed lowers its key rate when it judges that there is danger of a significant economic slowdown – a euphemism for recession – and that the inflation rate is not dangerously high.

A drop in the interest rate is one of the arrows – ammunition – that she has in her quiver.

Several strategists, and the market, estimated at the start of 2024 that the Fed would start lowering its key rate during 2024, as they thought during the first half of 2023, which did not happen.

However, recently, following the good performance of the economy, market participants have again reversed their forecasts which are now 5.1% for December 2024, if we rely on the futures contracts of the “Fed funds”.


Why lower the key rate if there is no recession in sight, especially since inflation has not yet reached the targeted 2%?

Assuming that the Fed does not lower its key rate — it could be “already in the market” — many stakeholders could be disappointed, which could lead them to exert a negative influence on the stock market.

But ultimately, what is the stock market interested in?

Profits. And these are a function of the economy.

Below: benefits carried out And planned (+26% by the end of 2025) with the economy carried out And planned


The data is “logged” in order to better visualize and compare movements over time.


Even if in the short term, there is tactical stock market risk due to:

  • of an economy returning to overheating (low probability?), and or,
  • the inflation rate which would be slow to reach 2%, and or,
  • the significant increase in the stock market of 28.8% since November 2023 (48.3% since October 2022), which has led certain measures of stock market sentiment to reflect a good deal of optimism and/or,
  • of the global political situation, always uncertain,

it remains that if medium-term economic forecasts come true, the stock market may come to be more concerned with economic growth and its positive effect on profits, than with interest rates.

And therefore, history could repeat itself again… and is added to the table at the top of the text.

The economic risk of this possible scenario?

The economy is going into recession while inflation is not falling => a Fed that cannot use the arrows it has in its quiver.

Important reservation: these observations were made on historical data which do not guarantee the future.

Data sources: BEA. American Federal Reserve. Bloomberg. Organisation for Economic Co-operation and Development. S&P Global.



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