The Federal Reserve’s success on inflation is also a reason that
returns have shrunk in both the stock and bond markets. As the
Fed was winning the fight against inflation, it provided a one-time
opportunity for big returns in the bond market as interest rates
adjusted to new lower levels. There were even bigger returns in
the stock market as the prospect of declining inflation raised the
value of future equity earnings in line with falling interest rates,
and then some. But now both these markets are assuming that inflation will be stable, with real rates and price-earnings (P/E) multiples
reflecting that stability. And you do not get to go to heaven
twice for winning the war against inflation—the “peace dividend”
is paid just once, as the victory occurs, not year after year
in its aftermath.
returns have shrunk in both the stock and bond markets. As the
Fed was winning the fight against inflation, it provided a one-time
opportunity for big returns in the bond market as interest rates
adjusted to new lower levels. There were even bigger returns in
the stock market as the prospect of declining inflation raised the
value of future equity earnings in line with falling interest rates,
and then some. But now both these markets are assuming that inflation will be stable, with real rates and price-earnings (P/E) multiples
reflecting that stability. And you do not get to go to heaven
twice for winning the war against inflation—the “peace dividend”
is paid just once, as the victory occurs, not year after year
in its aftermath.
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