Our recently published white paper—Inflation and Asset Allocation in the U.S. since 1995—draws lessons for U.S. asset allocation based on the full range of U.S. inflationary experience during the post-WWII period. The paper focuses on the real returns to U.S. stocks, bonds, and cash during 1955-2018.
One of the paper’s key findings is that stock and bond returns are not strongly related to the level of inflation. Rather, the returns are negatively related to the acceleration of inflation. The negative relationships between stock returns and inflation acceleration can be seen graphically in Figure 1, where each point represents the combination of excess stock return and inflation acceleration in a particular 5-year sub-period during 1955-2018 (the excess stock return is the return on stocks in excess to the return on an investment in cash).
Notice how excess stock returns were relatively high in the late 1980s and the late 1990s—periods of decelerating inflation in the U.S. In contrast, excess stock returns were relatively low in the late 1960s and early 1970s—periods of accelerating inflation.
If you are interested in reading the full white paper, you can access it by clicking this link.