Can the S&P 500 Keep Pace With Red-Hot Inflation?

Looking into how markets may respond to the latest CPI reading

Senior Quantitative Analyst
Jul 20, 2022 at 8:00 AM
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In case you haven’t noticed, prices are higher now than a year ago. The latest consumer price index (CPI) reading showed the biggest year-over-year change in over 40 years. A high inflationary environment is something the last two generations of investors have not had to deal with. In the analysis below, I will look at historical spikes in the CPI, and how stocks, as well as oil and gold prices, have performed moving forward.

CPI YOY Change

SPX Returns After CPI Spikes

Using CPI data since the late 1940s, the table below shows dates in which levels spiked 9% over the 12 months prior. There are not many data points, so we can't draw any hard conclusions, but let’s take a look at what happened.

Overall, the results were very mixed. In the next 12 months after these occurrences, there has been one terrible return (-20.3%), one decent return (14.2%), as well as one middling return (6.7%). Stocks struggled more in the shorter term, too, with the S&P 500 Index (SPX) down every time over the next month.

Note that the SPX is down roughly 12% over the past 12 months during the CPI spike. This returns most resembles the 1974 signal, in which the index fell about 17% over the 12 months prior. For what it’s worth, the SPX was terrible going forward, shedding over 20% in the next year.

SPX After CPI Reaches 9%

Checking In With Gold, Oil Prices

Gold is often considered a proper investment against inflation risk. The table below is like the one above, except it shows how gold performed during and after the CPI spikes. For those who owned gold during the inflationary environment of the 1970s, it may have saved their portfolios.

Gold was outstanding in the 12 months leading up to the signal dates and in the 12 months after. It gained about 180% and 33% after the last two occurrences. The asset underperformed after the 1951 signal date, but it might not be fair to include that since gold was still somewhat tied to the U.S. dollar until 1971.

Gold After CPI Reaches 9%

Oil prices have also spiked in the past year. The commodity is up close to 50% in the past 12 months, despite the recent pullback. This next table shows how oil performed during the last two inflationary environments, using price data going back to 1967.

Oil was another commodity worth holding after those signal dates in the 1970s. Oil easily doubled over the next year, after the CPI spike in January 1979, gaining about 130% over the next year.

In the year after the January 1974 signal, oil prices gained more than 22%, but that whole gain happened in just the first month. In fact, oil gained almost 30% in the single month after that CPI reading, and then gave some of that back over the next 11 months.

Oil After CPI Reaches 9%

One last thing to consider is where price levels went after these CPI spikes. Inflation continued to get worse in the next 12 months after these 9% year-over-year surges, with the price level going up double digits after both signals in the 1970s, and stocks gaining just over 14% after that signal in 1979. Prices gained 13%, however, meaning the SPX barely kept pace with inflation.

CPI After Signals


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