Investing in Deflation, Inflation, and Stagflation Regimes

Investing has been a reliable way to compound one’s inheritance over ages known throughout human history. But different monetary and fiscal situations, especially during times of uncertainty and extreme stress, force both individuals and institutions to adjust their financial habits. A recent research paper written by Guido Baltussen, Laurens Swinkels, and Pim van Vliet analyzed large samples of data starting from the 19th century and brought unique perspectives on how various asset classes perform during “quiet, good” periods and, on the other side, economic turmoil. Research summarized very actual topics of investing during those different cycles and what inflation does to returns across equities, bonds, and cash.

We would like to highlight some points we find most interesting and useful: Firstly, let’s define real returns as nominal returns minus inflation. Equities and bonds, on average, yield lower nominal returns during periods of high inflation (inflation > 4%), causing negative real returns. Further, equity returns tend to be relatively low in nominal terms in periods of deflation (inflation < 0%) but average in real terms. Stagflationary episodes with both high inflation and economic downturns (i.e., recessions) are truly bad times for investors; for example, nominal equity returns average -7.1% per annum, yielding double-digit negative returns in real terms.

In case you’re interested, we advise you to take a look at the presented tables from the last pages of the paper. Especially worth mentioning is a closer look at Table 3, which is both a great and very easily understandable summary of both nominal and real results from investing during those mentioned regimes. In addition, supplementary appendix tables provide useful robustness tests that confirm statistically significant results. 

Video summary:

Authors: Guido Baltussen, Laurens Swinkels, and Pim van Vliet

Title: Investing in Deflation, Inflation, and Stagflation Regimes



We examine asset class and factor premiums across inflationary regimes. As periods of high inflation and deflation are relatively uncommon in recent history, we use a deep sample starting in 1875. Moderate inflation scenarios provide the highest returns across asset class and factor premiums. During deflationary periods, nominal returns are low, but real returns are attractive. By contrast, real equity and bond returns are negative during a high inflation regime, and especially so during times of stagflation. During these ‘bad times’ factor premiums are positive, which helps to offset part of the real capital losses.

As always we present several interesting figures:

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