Unloved Bull Markets

Chapter 5Inflation and Interest Rates

Figure 5.1 shows the twelve-month rate of change for the Consumer Price Index (CPI) from January 1970 to April 2021. At the left, it can be seen how quickly inflation accelerated in the 1970s, especially from 1977 to 1980. The peak was March 1980 at 14.8%. What may surprise many is how quickly it was reduced. Disinflation took only about three years, from that peak in March 1980 to August 1983, when it was tamed to a docile 2.6% over the previous twelve months. Since January 1983, as measured by the CPI, inflation has averaged only 2.64% over all of the rolling twelve-month periods through April 2021 (straight line). Disinflation wasn't a twenty- or thirty-year process; it took three years. There have been spurts of inflation since 1983 but nothing significant or sustainable. From the graph it seems so obvious that inflation was tamed and nothing to worry about.

Yet investors kept worrying about inflation returning. We have been doing presentations to financial advisor and investor audiences since 1991. The most frequent objection to owning stocks and bonds the entire time has been the fear that inflation was coming back and, therefore, interest rates were going higher. Those concerns have persisted during the recent multiyear bull market and kept many investors in cash. As evidence we point to mortgage brokers who have been successfully appealing to that fear by stating, “Refinance your home now before interest rates go higher.” That ...