But what if inflation persists?
Runaway inflation in a marketplace – which is still clinging for stability post COVID – could warrant more defensive portfolio positioning. Lower-volatility equities (developed over emerging markets) and naturally, inflation-hedging assets would be favored. Emerging markets are more likely to be negatively impacted by rising inflation as many countries are classified as net importers.
Also, although inflation tends to reward equities more than bonds, when examining S&P 500 returns by decade and adjusting for inflation, the results show the highest real returns occur when inflation is 2% to 3%. This means a persistent print of inflation in the mid-single digits could be worrisome for both stocks and bonds, especially if growth is slowing.