The Impact of Inflation on Stock Market Recoveries

Much has been written on the length and total recovery (trough to peak) of various stock market recoveries over the past century. Little attention has been given to the effects of inflation on these recoveries. This is a most important element in stock market returns after all we are trying to improve our spending power by investing in equities. To get a true view of this improvement in spending power one needs to add the dividends to the capital gain of the stocks and then apply it against the inflation that has eroded spending power over that time period. We have started with the year-end levels prior to the downturn and charted their performance for ten years.

The chart above shows the performance of the market following four major downturns over the past century. As one can see the current recovery from the 2008 financial crash is the strongest but only barely stronger than that experienced after the 1973 oil embargo. The other two major downturns in 1929 and 2000 did not recover their year-end levels of ten years previously.

When one looks at the chart below, which adjusts the same returns for inflation, it is apparent that the high inflation of the seventies has eaten into the purchasing power of the recovery in a major way. The recovery after the oil embargo falls into line with the other two crashes and shows that the current recovery is far stronger than its predecessors.