Is deflation good or bad for the S&P 500?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
McGilicutty
Posts: 349
Joined: Tue Dec 13, 2016 5:24 pm

Is deflation good or bad for the S&P 500?

Post by McGilicutty »

I'm of the opinion that deflation is coming down the pipe. I also have most of my monies in S&P 500 or total stock market index funds/ETFs.

I'm kind of baffled as to why the stock market has held up so well with what I see as massive deflationary pressure coming (1/3 of US renters not paying rent this month, oil going to less than zero, used car glut a coming, etc.).

Is the S&P 500 holding up so well because most of the value in companies these days is in Intellectual Property? Are most S&P 500 companies these days service companies with few physical assets? Is the fact that many of the largest companies have massive cash hoards and will be able to take advantage of the deflation by buying assets as fire sale prices?

Anyhoo, I'd be curious to know what bogleheads think about this. If we do see sustained deflation, will that actually be a good thing for U.S. stocks?

Thoughts?
DonIce
Posts: 1127
Joined: Thu Feb 21, 2019 6:44 pm

Re: Is deflation good or bad for the S&P 500?

Post by DonIce »

McGilicutty wrote: Tue Apr 21, 2020 2:39 am Is the S&P 500 holding up so well because most of the value in companies these days is in Intellectual Property? Are most S&P 500 companies these days service companies with few physical assets? Is the fact that many of the largest companies have massive cash hoards and will be able to take advantage of the deflation by buying assets as fire sale prices?
The S&P500 is holding up because ~$7 trillion is a lot of money. That's the total injected into the economy so far between the federal reserve and the federal government. That's about 1/3 of a year of GDP, thrown into the economy in just about 1 month. The deflationary pressures you mentioned are probably at least counter-balanced by this.

Most S&P500 companies are deeply in debt after years of borrowing to push up their stock prices via buybacks. The opposite of having massive cash hoards.
Last edited by DonIce on Tue Apr 21, 2020 2:56 am, edited 2 times in total.
User avatar
Gray
Posts: 808
Joined: Sat Apr 16, 2011 5:33 am
Location: Virginia

Re: Is deflation good or bad for the S&P 500?

Post by Gray »

Deflation with all the money printing dropped from helicopters?
Valuethinker
Posts: 42063
Joined: Fri May 11, 2007 11:07 am

Re: Is deflation good or bad for the S&P 500?

Post by Valuethinker »

McGilicutty wrote: Tue Apr 21, 2020 2:39 am I'm of the opinion that deflation is coming down the pipe. I also have most of my monies in S&P 500 or total stock market index funds/ETFs.

I'm kind of baffled as to why the stock market has held up so well with what I see as massive deflationary pressure coming (1/3 of US renters not paying rent this month, oil going to less than zero, used car glut a coming, etc.).

Is the S&P 500 holding up so well because most of the value in companies these days is in Intellectual Property? Are most S&P 500 companies these days service companies with few physical assets? Is the fact that many of the largest companies have massive cash hoards and will be able to take advantage of the deflation by buying assets as fire sale prices?

Anyhoo, I'd be curious to know what bogleheads think about this. If we do see sustained deflation, will that actually be a good thing for U.S. stocks?

Thoughts?
It's almost certainly bad for most companies. Bad for profitability because a fall in revenue on fixed costs (selling price per unit falls even if volume recovers) is bad for profits.

In fact, if you are in manufacturing, it's been the case for the last 25 years - selling prices falling faster than input prices (or rising more slowly), and a frantic race to cut costs by any means possible. There actually is an observable "WalMart effect" I believe that WalMart cuts prices in an area when it opens (cuts the general level of pricing of all stores in the categories it sells) - and WalMart's whole business model was about ruthless operational efficiency. Amazon the same in online categories that it enters.

Basically your selling prices, what you charge the customer, are likely to fall faster than your input prices. I think Law Firms have been living in this world since 2008 - the clients won't sign big open tickets any more, they price per transaction or piece of work, and if the hours run over that's for the law firm to absorb? They have compensated for this by increased volume of work - sweating their human assets harder.

Low oil prices is one good thing I can see because it lowers everyone's input costs. But of course it's very bad for the oil industry, and the US has a huge oil industry. It may be that refiners are able to benefit but to the extent they have oil in storage at higher prices, that's going to hurt.
Seasonal
Posts: 2456
Joined: Sun May 21, 2017 1:49 pm

Re: Is deflation good or bad for the S&P 500?

Post by Seasonal »

The factors that would cause deflation are very bad for the S&P 500.
Seasonal
Posts: 2456
Joined: Sun May 21, 2017 1:49 pm

Re: Is deflation good or bad for the S&P 500?

Post by Seasonal »

Gray wrote: Tue Apr 21, 2020 2:55 am Deflation with all the money printing dropped from helicopters?
Remember 2008?
User avatar
kelway
Posts: 162
Joined: Wed Jan 06, 2016 2:37 pm
Location: Nashville, TN, USA

Re: Is deflation good or bad for the S&P 500?

Post by kelway »

Inflation encourages us and corporations to buy now. If we know a good or service will be cheaper in the following months, then it clearly encourages us to hold off. That can’t be a good thing for the markets.
awval999
Posts: 1254
Joined: Fri Apr 08, 2011 10:17 pm

Re: Is deflation good or bad for the S&P 500?

Post by awval999 »

Deflation will never be allowed to occur in the United States.
https://en.wikipedia.org/wiki/Bernanke_doctrine
alex_686
Posts: 7815
Joined: Mon Feb 09, 2015 2:39 pm

Re: Is deflation good or bad for the S&P 500?

Post by alex_686 »

Seasonal wrote: Tue Apr 21, 2020 4:36 am
Gray wrote: Tue Apr 21, 2020 2:55 am Deflation with all the money printing dropped from helicopters?
Remember 2008?
To extend, what is money? M1 was expanded during 2008, but look at the wider definition of money - say M4, and money declined.

Most “money” is not created or printed by the Feds or the Treasury but via banks and the commercial paper market. The later have been struggling.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
User avatar
nisiprius
Advisory Board
Posts: 42852
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Is deflation good or bad for the S&P 500?

Post by nisiprius »

It's a very bad thing for the economy. Or rather, deflation is a symptom of a desperately sick economy. The stock market is loosely linked to the economy. Both words are important: "linked" and "loosely."

Over 1929 through 1932 inclusive, inflation averaged -6.5% (negative) per year (CAGR).
In dollars, stocks averaged a total return of -22.7% per year.
The real return, taking deflation into account, was -17.3% per year.

Thus, deflation gave a tiny boost to a catastrophic loss, making it slightly less catastrophic than the raw numbers would indicate.

In a very rough way, most investments have a vague tendency to earn a characteristic real return, relative to inflation. It's not reliable in the short or even the intermediate term, but it's there. Thus the so-called "Siegel's constant" is a pragmatic observation that US stocks have tended to return about 6-7% per year when measured over appropriately long periods of time. To the extent that stocks follow inflation, deflation would neither good nor bad. It means that stocks will yield less in dollars than usual, but it wouldn't matter because everything you are buying with your investment returns close less than usual. But as the lesson of 1929-1932 shows, the damage to the economy was far more important, and stocks did not come anywhere close to turns +6% or +7% real.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
alex_686
Posts: 7815
Joined: Mon Feb 09, 2015 2:39 pm

Re: Is deflation good or bad for the S&P 500?

Post by alex_686 »

I will second that it is bad for the economy and bad for the stock market. If inflation is a tax on savings, than deflation is a tax on investing.

Take the economic pie and cut it down between the haves and have nots. If you hold bonds you get a extra risk-free returns for literally just holding onto money and bonds. If you have got wealth going defensive and holding financial assets is the winning strategy. If you are a entrepreneur and a risk taker, you have to overcome the extra drag of deflation. You need to take more risk for less rewards.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
User avatar
nisiprius
Advisory Board
Posts: 42852
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Is deflation good or bad for the S&P 500?

Post by nisiprius »

awval999 wrote: Tue Apr 21, 2020 5:36 am Deflation will never be allowed to occur in the United States.
https://en.wikipedia.org/wiki/Bernanke_doctrine
1) The name of the Fed chair is not "Ben Bernanke."

2) Deflation of -2.06% was "allowed" to occur from 8/2008 through 7/2009, inclusive, which was during Ben Bernanke's tenure.

3) Fed chairs can't always get what they want.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
JoMoney
Posts: 10879
Joined: Tue Jul 23, 2013 5:31 am

Re: Is deflation good or bad for the S&P 500?

Post by JoMoney »

You don't need to have an "opinion" or believe the deflation is "coming"... it's here.

Deflation means a decline in "business", productivity, growth in general. It's not only a lack of demand for money, but the things we exchange money for (including taxes so it's bad for government in that regard too).
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Valuethinker
Posts: 42063
Joined: Fri May 11, 2007 11:07 am

Re: Is deflation good or bad for the S&P 500?

Post by Valuethinker »

JoMoney wrote: Tue Apr 21, 2020 8:12 am You don't need to have an "opinion" or believe the deflation is "coming"... it's here.

Deflation means a decline in "business", productivity, growth in general. It's not only a lack of demand for money, but the things we exchange money for (including taxes so it's bad for government in that regard too).
Strictly speaking, deflation is a fall in the overall level of prices. Antonym of inflation (rising prices).

What you are describing is a recession or in the extreme case a depression.

You can have inflation, and a recession. That was common in the 1970s & 80s, for example.
User avatar
SimpleGift
Posts: 3869
Joined: Tue Feb 08, 2011 3:45 pm
Location: Central Oregon

Re: Is deflation good or bad for the S&P 500?

Post by SimpleGift »

McGilicutty wrote: Tue Apr 21, 2020 2:39 am Anyhoo, I'd be curious to know what bogleheads think about this. If we do see sustained deflation, will that actually be a good thing for U.S. stocks?
First of all, if we have deflation this year and next (which the bond markets are expecting), it's likely to be mild and short-lived, much like in the Fall of 2018 during the Financial Crisis. The Fed will move heaven and earth, as they have been, to prevent deep and persistent deflation in the U.S. — it's just not likely to happen.

Second, historically, S&P 500 stocks have done well during periods of mild deflation (0% to -4%), as well as mild inflation (0% to 4%). It's only when deflation or inflation gets to extremes that stocks have historically suffered (chart below):
In sum, any current deflation is expected to be mild and short-term, with little impact on stocks, in my view.
carolinaman
Posts: 4494
Joined: Wed Dec 28, 2011 9:56 am
Location: North Carolina

Re: Is deflation good or bad for the S&P 500?

Post by carolinaman »

Deflation is bad for business and the economy and markets. When prices continue to fall people & businesses have a tendency to delay major expenditures. Why buy today when prices will be cheaper 6 months or a year from now. It can be very hard to get out of that cycle once that mindset is there.
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 6:18 pm

Re: Is deflation good or bad for the S&P 500?

Post by Phineas J. Whoopee »

Without arguing, I will say it depends on the length and depth of the deflation. A short shallow episode rapidly reflated will cause pain. A long, continued period of deflation, such as the US has experienced in the past, like for a couple of decades after the panic of 1873, which by its friends is called the Crime of '73 for short, will do enormous financial damage, not just to stocks but to everybody. It will destroy lots of demand.

Moderators -- somebody may object to this statement as political. I'm risking it anyway: Negative demand shocks cause supply to fall. That's the most insidious part if the situation persists over a long time. -- Thank you moderators.

We don't know the future. That's one of the problems, but it's part of our human condition.

PJW
Alex Frakt
Founder
Posts: 11101
Joined: Fri Feb 23, 2007 1:06 pm
Location: Chicago
Contact:

Re: Is deflation good or bad for the S&P 500?

Post by Alex Frakt »

Phineas J. Whoopee wrote: Tue Apr 21, 2020 9:08 pm Without arguing, I will say it depends on the length and depth of the deflation. A short shallow episode rapidly reflated will cause pain. A long, continued period of deflation, such as the US has experienced in the past, like for a couple of decades after the panic of 1873, which by its friends is called the Crime of '73 for short, will do enormous financial damage, not just to stocks but to everybody. It will destroy lots of demand.

Moderators -- somebody may object to this statement as political. I'm risking it anyway: Negative demand shocks cause supply to fall. That's the most insidious part if the situation persists over a long time. -- Thank you moderators.
We'll allow it for now. Although if it results in calls for a return to the gold standard, we will have to reconsider. :wink:
Ferdinand2014
Posts: 1895
Joined: Mon Dec 17, 2018 6:49 pm

Re: Is deflation good or bad for the S&P 500?

Post by Ferdinand2014 »

SimpleGift wrote: Tue Apr 21, 2020 8:30 am
McGilicutty wrote: Tue Apr 21, 2020 2:39 am Anyhoo, I'd be curious to know what bogleheads think about this. If we do see sustained deflation, will that actually be a good thing for U.S. stocks?
First of all, if we have deflation this year and next (which the bond markets are expecting), it's likely to be mild and short-lived, much like in the Fall of 2018 during the Financial Crisis. The Fed will move heaven and earth, as they have been, to prevent deep and persistent deflation in the U.S. — it's just not likely to happen.

Second, historically, S&P 500 stocks have done well during periods of mild deflation (0% to -4%), as well as mild inflation (0% to 4%). It's only when deflation or inflation gets to extremes that stocks have historically suffered (chart below):
In sum, any current deflation is expected to be mild and short-term, with little impact on stocks, in my view.
Interesting information. Thanks for posting.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
User avatar
birdog
Posts: 1222
Joined: Fri Apr 07, 2017 1:35 pm
Location: God's Country

Re: Is deflation good or bad for the S&P 500?

Post by birdog »

Gray wrote: Tue Apr 21, 2020 2:55 am Deflation with all the money printing dropped from helicopters?
Yes. Deflationary forces are occurring now.

Jan: 2.5%
Feb: 2.3%
Mar: 1.5%

People aren't buying things and driving up the costs goods.

https://www.usinflationcalculator.com/i ... ion-rates/
balbrec2
Posts: 407
Joined: Mon Nov 13, 2017 3:03 pm

Re: Is deflation good or bad for the S&P 500?

Post by balbrec2 »

Valuethinker wrote: Tue Apr 21, 2020 8:26 am
JoMoney wrote: Tue Apr 21, 2020 8:12 am You don't need to have an "opinion" or believe the deflation is "coming"... it's here.

Deflation means a decline in "business", productivity, growth in general. It's not only a lack of demand for money, but the things we exchange money for (including taxes so it's bad for government in that regard too).
Strictly speaking, deflation is a fall in the overall level of prices. Antonym of inflation (rising prices).

What you are describing is a recession or in the extreme case a depression.

You can have inflation, and a recession. That was common in the 1970s & 80s, for example.
This was called stagflation and was probably the worst type of economic scenario possible.
The cure for inflation and deflation are diametrically opposed. One thing would need to be made worse to cure the other.
Paul Volcker tackled the inflation part of this by raising interest rates which in the process of lowering inflation
also kept economic growth depressed. It was a tough time for many. The misery index was born out of the 70's.
jpelder
Posts: 834
Joined: Mon Jan 26, 2015 3:56 pm
Location: Concord, NC

Re: Is deflation good or bad for the S&P 500?

Post by jpelder »

nisiprius wrote: Tue Apr 21, 2020 6:15 am
awval999 wrote: Tue Apr 21, 2020 5:36 am Deflation will never be allowed to occur in the United States.
https://en.wikipedia.org/wiki/Bernanke_doctrine
1) The name of the Fed chair is not "Ben Bernanke."

2) Deflation of -2.06% was "allowed" to occur from 8/2008 through 7/2009, inclusive, which was during Ben Bernanke's tenure.

3) Fed chairs can't always get what they want.
All is true. However, the Federal Reserve and the Treasury Department have lots of tools to prevent deflation. "Helicopter Money" is one of them.

Deflation is a very bad thing for the economy as a whole, since it causes demand to dry up (why buy now for $100 when you can buy in 6 months for $90?). It can start a sort of death spiral where more deflation reduces demand, which increases deflation, and so on. But, like I said, the Fed can loan money at no interest and/or just print money and throw it into the market to keep some mild inflationary pressure going.
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 6:18 pm

Re: Is deflation good or bad for the S&P 500?

Post by Phineas J. Whoopee »

birdog wrote: Wed Apr 22, 2020 9:58 am
Gray wrote: Tue Apr 21, 2020 2:55 am Deflation with all the money printing dropped from helicopters?
Yes. Deflationary forces are occurring now.

Jan: 2.5%
Feb: 2.3%
Mar: 1.5%

People aren't buying things and driving up the costs goods.

https://www.usinflationcalculator.com/i ... ion-rates/
I believe what you are referring to is called disinflation, a reduction in the rate of inflation. By contrast, deflation is prices generally, across the economy, persistently going down. There will be particular goods and services that are exceptions, of course.

PJW
MarginalUtility
Posts: 18
Joined: Wed Aug 21, 2019 3:39 pm

Re: Is deflation good or bad for the S&P 500?

Post by MarginalUtility »

One of the principal challenges imposed by deflation is debt repayment. Interest rates on debt may vary, but debt principal typically is fixed in nominal (not real) dollars.

Suppose the recent upsurge in unemployment decreases borrowers' ability to repay their debts. They may sell assets, including equity holdings, in an attempt to repay. These sales may dampen equity prices, and encourage others to sell. Paying one's mortgage likely takes priority even if equity valuations seem attractive based on the present value of future expected cash flows.

Further suppose many unemployed borrowers are unable to repay their debts despite selling assets. Their lenders, often highly leveraged financial institutions, may succumb. The insolvency of one or more major lenders, or even the prospect of this insolvency, may cause the payments system to seize up, endangering the entire economy. We faced this prospect in September 2008.

Fiscal and monetary policy may defeat a deflationary spiral. Whether current efforts will suffice remains to be seen.
User avatar
willthrill81
Posts: 23461
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Is deflation good or bad for the S&P 500?

Post by willthrill81 »

McGilicutty wrote: Tue Apr 21, 2020 2:39 am I'm of the opinion that deflation is coming down the pipe.
Data from the BLS seems to support that. They reported this yesterday.
he Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in May on a seasonally adjusted basis after falling 0.8 percent in April, the U.S. Bureau of Labor Statistics reported today.
The index for all items less food and energy fell 0.1 percent in May, its third consecutive monthly decline. This is the first time this index has ever declined in three consecutive months.
https://www.bls.gov/news.release/cpi.nr0.htm

We would need 1.1% inflation for the remainder of the year for inflation for the year to be zero. I don't think that's likely.

In fact, I wouldn't be surprised if we see near zero inflation for the next couple of years.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
000
Posts: 4613
Joined: Thu Jul 23, 2020 12:04 am

Re: Is deflation good or bad for the S&P 500?

Post by 000 »

McGilicutty wrote: Tue Apr 21, 2020 2:39 am I'm kind of baffled as to why the stock market has held up so well with what I see as massive deflationary pressure coming (1/3 of US renters not paying rent this month, oil going to less than zero, used car glut a coming, etc.).
Well, the S&P 500 has done great since April and the September slump seemed to be for reasons other than deflation.

So, what happened? Are we not having deflation? Are stocks in a bubble? Or is this the case?
McGilicutty wrote: Tue Apr 21, 2020 2:39 am Is the S&P 500 holding up so well because most of the value in companies these days is in Intellectual Property? Are most S&P 500 companies these days service companies with few physical assets?
Or something else?
RickyAZ
Posts: 65
Joined: Sun Dec 08, 2019 6:27 pm

Re: Is deflation good or bad for the S&P 500?

Post by RickyAZ »

The US economy is a lot more complex than oil and rents. The housing market is booming in the suburbs, south and west; tech (including alternative energy) is growing and provides support to the entire economy that maybe only China can match. Doom, gloom and fear sell but there are plenty of opportunities out there.
kjm
Posts: 54
Joined: Wed Aug 26, 2009 1:05 pm

Re: Is deflation good or bad for the S&P 500?

Post by kjm »

When the dollar goes down, the price of assets denominated in dollars (like stocks) goes up. This is inflation and what the Fed wants because inflation is easily conflated with real growth. The correlation between DXY and SPX is about -0.4 since May just to quantify the relationship.

I agree with you that deflation (dollar up, asset prices down) is the more likely scenario, at least for now and despite the increase in money supply. I think once employment returns to normal, consumer confidence picks up, and people start spending again, inflation is going to spike quickly. There are a lot of pent up dollars waiting to be spent.

Just note, the relationship between the dollar and stocks isn't set in stone. Stocks may go up during a deflationary period as people try to front-run the beginning of a new inflationary period.
User avatar
firebirdparts
Posts: 2267
Joined: Thu Jun 13, 2019 4:21 pm

Re: Is deflation good or bad for the S&P 500?

Post by firebirdparts »

Deflation is bad, bad, bad, for the companies of the S&P500, and bad for borrowers, which is basically every institution that doesn't operate with an "endowment". I can think of a lot of reasons deflation would be coming, along with some reasons it might not.
A fool and your money are soon partners
SteadyOne
Posts: 295
Joined: Fri Mar 22, 2019 5:26 pm

Re: Is deflation good or bad for the S&P 500?

Post by SteadyOne »

Deflation = Great Depression
“Every de­duc­tion is al­lowed as a mat­ter of leg­isla­tive grace.” US Federal Court
balbrec2
Posts: 407
Joined: Mon Nov 13, 2017 3:03 pm

Re: Is deflation good or bad for the S&P 500?

Post by balbrec2 »

Seasonal wrote: Tue Apr 21, 2020 4:36 am The factors that would cause deflation are very bad for the S&P 500.
Someone very certain that deflation will rule the days coming, should have
a large portion of their money in long term treasuries. Come to think of it, even money under the mattress
does well in a deflationary environment.
I'm never that certain about anything.
Valuethinker
Posts: 42063
Joined: Fri May 11, 2007 11:07 am

Re: Is deflation good or bad for the S&P 500?

Post by Valuethinker »

RickyAZ wrote: Thu Oct 08, 2020 6:25 pm The US economy is a lot more complex than oil and rents. The housing market is booming in the suburbs, south and west; tech (including alternative energy) is growing and provides support to the entire economy that maybe only China can match. Doom, gloom and fear sell but there are plenty of opportunities out there.
The UK is a much smaller country (say New England sized; 700 miles end-to-end for the mainland) and about 70 million people (so 1/4er-1/5th the population?

But we have exponentially rising Covid-19 cases. And the outlook for the economy is not good, as local areas are locked down again (and it could go national).

I agree the US economy is big and has many diverse activities. However if consumer spending is not growing (which might be the case, particularly given the number of unemployed), and state & local governments are cutting back, is it likely the US economy will stay buoyant?
User avatar
bottlecap
Posts: 6605
Joined: Tue Mar 06, 2007 11:21 pm
Location: Tennessee

Re: Is deflation good or bad for the S&P 500?

Post by bottlecap »

nisiprius wrote: Tue Apr 21, 2020 6:01 am It's a very bad thing for the economy. Or rather, deflation is a symptom of a desperately sick economy. The stock market is loosely linked to the economy. Both words are important: "linked" and "loosely."

Over 1929 through 1932 inclusive, inflation averaged -6.5% (negative) per year (CAGR).
In dollars, stocks averaged a total return of -22.7% per year.
The real return, taking deflation into account, was -17.3% per year.
Conversely, deflation occurred in the U.S. between 1817 and 1860 and then again between 1865 and 1900. These periods coincided some of the most rapid economic growth the country has ever seen.

1929 to 1932 is a very small sample size compared to what came before. Deflation may be a symptom of something, but not necessarily a sick economy.

JT
Blue456
Posts: 1211
Joined: Tue Jun 04, 2019 5:46 am

Re: Is deflation good or bad for the S&P 500?

Post by Blue456 »

bottlecap wrote: Fri Oct 09, 2020 7:47 am
nisiprius wrote: Tue Apr 21, 2020 6:01 am It's a very bad thing for the economy. Or rather, deflation is a symptom of a desperately sick economy. The stock market is loosely linked to the economy. Both words are important: "linked" and "loosely."

Over 1929 through 1932 inclusive, inflation averaged -6.5% (negative) per year (CAGR).
In dollars, stocks averaged a total return of -22.7% per year.
The real return, taking deflation into account, was -17.3% per year.
Conversely, deflation occurred in the U.S. between 1817 and 1860 and then again between 1865 and 1900. These periods coincided some of the most rapid economic growth the country has ever seen.

1929 to 1932 is a very small sample size compared to what came before. Deflation may be a symptom of something, but not necessarily a sick economy.

JT
But can we really compare current markets with those 20,30 or 100 years ago? Wouldn’t it be more accurate to compare Japanese deflation as to what future US inflation “may” look like?
Seasonal
Posts: 2456
Joined: Sun May 21, 2017 1:49 pm

Re: Is deflation good or bad for the S&P 500?

Post by Seasonal »

balbrec2 wrote: Fri Oct 09, 2020 7:33 am
Seasonal wrote: Tue Apr 21, 2020 4:36 am The factors that would cause deflation are very bad for the S&P 500.
Someone very certain that deflation will rule the days coming, should have
a large portion of their money in long term treasuries. Come to think of it, even money under the mattress
does well in a deflationary environment.
I'm never that certain about anything.
Investing based on macro forecasts is most likely a mistake. If nothing else, the market may well have already adjusted.
Mickelous
Posts: 174
Joined: Mon Apr 20, 2020 11:24 pm

Re: Is deflation good or bad for the S&P 500?

Post by Mickelous »

Blue456 wrote: Fri Oct 09, 2020 8:20 am
bottlecap wrote: Fri Oct 09, 2020 7:47 am
nisiprius wrote: Tue Apr 21, 2020 6:01 am It's a very bad thing for the economy. Or rather, deflation is a symptom of a desperately sick economy. The stock market is loosely linked to the economy. Both words are important: "linked" and "loosely."

Over 1929 through 1932 inclusive, inflation averaged -6.5% (negative) per year (CAGR).
In dollars, stocks averaged a total return of -22.7% per year.
The real return, taking deflation into account, was -17.3% per year.
Conversely, deflation occurred in the U.S. between 1817 and 1860 and then again between 1865 and 1900. These periods coincided some of the most rapid economic growth the country has ever seen.

1929 to 1932 is a very small sample size compared to what came before. Deflation may be a symptom of something, but not necessarily a sick economy.

JT
But can we really compare current markets with those 20,30 or 100 years ago? Wouldn’t it be more accurate to compare Japanese deflation as to what future US inflation “may” look like?
The problem with all other times with other countries that had deflation, is that deflation is one ingredient in an economy's recipe for success or failure. It would be difficult to find several economic factors that were present in another era and possibly geographic region that would come remotely close to mirroring present day USA.
000
Posts: 4613
Joined: Thu Jul 23, 2020 12:04 am

Re: Is deflation good or bad for the S&P 500?

Post by 000 »

Well, I'm going to go out on a limb and guess that deflation won't be bad for the S&P 500. It may even be actively good as megacaps crush main street businesses during a deflationary event.
User avatar
willthrill81
Posts: 23461
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Is deflation good or bad for the S&P 500?

Post by willthrill81 »

000 wrote: Fri Oct 09, 2020 8:38 pm Well, I'm going to go out on a limb and guess that deflation won't be bad for the S&P 500. It may even be actively good as megacaps crush main street businesses during a deflationary event.
I remember 15-20 years ago hearing so-called oracles of business decrying large companies, saying that they wouldn't be able to move quickly enough in the fast-paced 21st century. And for the last decade at least now, it's been large-caps, especially in growth, that have been going like gangbusters.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
000
Posts: 4613
Joined: Thu Jul 23, 2020 12:04 am

Re: Is deflation good or bad for the S&P 500?

Post by 000 »

willthrill81 wrote: Fri Oct 09, 2020 9:53 pm I remember 15-20 years ago hearing so-called oracles of business decrying large companies, saying that they wouldn't be able to move quickly enough in the fast-paced 21st century. And for the last decade at least now, it's been large-caps, especially in growth, that have been going like gangbusters.
A lot of economics and investing "wisdom" really needs to be thrown out at this point.

The nature of commerce has changed more in the last twenty years than it did in the preceding fifty (1950 - 2000).
Post Reply