Tariffs and Stagflation
How To Invest Markets & EconomyThis article originally appeared in Above the Fray, a weekly newsletter for Dimensional clients.
By: Wes Crill, PhDSenior Client Solutions Director and Vice President
One of the concerns arising from tariff talks is the possibility of stagflation, or the combination of rising inflation and an economic contraction. But should investors act on this concern with their investments?
Since 1930, the US has seen 12 years when negative GDP growth coincided with positive changes in the consumer price index (CPI). The US stock market’s real return—its return in excess of inflation—was positive in nine out of those 12. That hit rate is close to the frequency of positive real returns across all years between 1930 and 2024, which is 68%.
This is another example demonstrating how concerns over the economy shouldn’t drive portfolio decisions. Predictions about the direction of the economy are continuously forming, but the market itself remains the best predictor of the future. That means market prices are set to levels to deliver positive expected returns even amid concerns over future economic outcomes.
Past performance is not a guarantee of future results. Actual returns may be lower.