Here’s Proof That Stocks Were Never an Inflation Hedge

Credit Suisse says that investors are relearning the law of risk and return, and advises them to adjust their future expectations accordingly.

Bigstock Photo

Bigstock Photo

History can’t be changed, but Credit Suisse hopes that investors will learn from it.

Since 1999, the Credit Suisse Research Institute has published a guide to historical long-run returns called the Global Investment Returns Yearbook. It partners with the London Business School to create the report, a 272-page highly anticipated finance tome that now covers the performance of major asset classes in 35 countries since 1900.

From 1900 through 2022, stocks across the globe had annualized real returns of 5 percent, compared to 1.7 percent for bonds, according to the 2023 report, which was published on Thursday. Over that same period, the country with the best performing stock market was Australia, which in U.S. dollar terms had an annualized real return of 6.43 percent. The U.S. was right behind the Aussies at 6.38 percent.

With bonds delivering stock-like returns since the 1980s, investors got a shock this year as historical relationships returned. Inflation and rising rates will pummel bonds. Losses on bonds were historically bad in most countries last year.

“When inflation was exceedingly low, in periods of deflation, bonds did quite well. In periods of high inflation, bonds did absolutely dreadfully, and that’s exactly what you’d expect,” said Paul Marsh, emeritus professor of finance at the London Business School, during a presentation on the report Thursday. Marsh, who previously served as a dean at the school, has been a consultant to financial services firms, and was part of the team that designed, among other things, the FTSE 100 Share Index.

But, according to the authors, this year’s report should also serve as an important reminder that stocks were never an inflation hedge.


“Equities are not an inflation hedge. When inflation is high, they tend to do poorly. But in the long run, they have beaten inflation, so a lot of people claim they’re an inflation hedge, but [that claim is the result of confusion]. In the long run, stocks beat inflation, but they do it because of the equity risk premium. They are not an inflation hedge. They have a negative correlation with inflation,” said Marsh.

And the performance of portfolios in 2022 proved that point, he said. The hedge that investors thought they had created by investing in both stocks and bonds failed due to inflation, sharp increases in real interest rates, and rate-hiking cycles.

As the authors explained in the report, “a historical risk premium in equity and bond returns relative to bills exists for a reason, that being a necessary payment for the risk of volatility and drawdown. A prolonged period of high and stable real returns had perhaps dimmed the focus of many here.”

Years of outsize returns also lulled investors on the correlation between stocks and bonds. Fixed income has historically acted as a portfolio stabilizer when markets are declining. When stocks tank, bonds have done well. But that correlation has changed over time.

From 1900-1949, Marsh explained, Credit Suisse found that the average correlation between stocks and bonds globally was 0.45, while from 1950 to 1999, the relationship had a correlation of 0.34.

As the authors wrote in the report: “The recent fortunes of 60/40 equity/bond strategies are a painful example of this, having trusted too heavily in the recent negative correlations between the two assets rather than properly consulting the history books.”

To be clear, the report doesn’t recommend that investors abandon their investments in stocks and bonds, or that they should choose one asset class over the other. Its primary goal is to demonstrate that some of the financial and economic relationships and connections that many investors make either don’t exist or don’t always operate the way people think they do.