Does the Stock Market Love Inflation?

It appears so. Here’s a graph of the S&P 500 versus the 10-year inflation premium (the 10-year T-bond yield minus the 10-year TIPs yield). Since 2008, these two series have been waltzing partners.

There’s no reason to expect a long-term relationship to last. After all, we’re comparing a price index to a yield. But, for whatever reason, whatever causes investors to expect more inflation seems to be highly aligned with higher equity prices. Correlation, of course, doesn’t mean causation.

Posted by on February 22nd, 2012 at 10:13 am

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