Inflation, stocks, and bonds

stock market graph

In 89 of the last 97 years, inflation was lower than the total return in the stock and bonds markets. So says the annual compendium of investment returns from Ibbotson Associates, “Stocks, Bonds, Bills, and Inflation: 2023 Yearbook.” In only eight years did inflation outpace investment returns, but 2022 was one of those years. As inflation reached 6.45%, the total return from large company stocks fell by 18.11%, and those of long-term government and corporate bonds by over 26%.

The table below has examples of returns in the four post-war years when inflation beat the financial markets.

Selected investment returns and inflation


Large company stocks

Long-term corporate bonds

Long-term government bonds






















Source: “Stocks, Bonds, Bills, and Inflation” 2023 Yearbook; Ibbotson Associates.

For investors in the accumulation phase of the financial life cycle, a down year for stocks and bonds means that securities are on sale, at prices that could prove to be bargains.  In the longer term, the bad years are fully offset by the good ones. On the other hand, for those who are retired, whose time horizon for drawing down principal has arrived, a down year can have very negative long-term consequences. Projections such as that a 4% withdrawal rate can be sustained for an entire retirement tend to work less well in an inflationary environment. Retirees are well advised to have some cash on hand so as to not have to sell stocks at a low point. 

Past performance does not predict future results, but what has happened in the next year, after inflation beat the stock and bond markets? As the table shows, 1974 was even worse for the stock market than was 1973.  Recovery came in 1975, when large company stocks rose 37.23%.  In 2019, stocks rose 31.49%.

Professional investment managers tend to focus on controlling the downside risks for their clients. In general, the pain of loss is larger than the satisfaction of gain for many people.  If you would like a portfolio review by one of our investment officers, please give us a call to arrange an appointment at your convenience.

© 2023 M.A. Co.