With the year almost gone, and with an incredible 25%+ return in terms of the S&P500, it’s interesting to realize that over the last three years, an investor has only made money since August this year. Furthermore, if we adjust the return for inflation, using CPI, as shown in that chart below, we will realize that an investor has only made 15%, or roughly 4.8% per year. That has been the cumulative impact of inflation on the index. For bonds, using the U.S. Agg index, we are still underwater in the same period in nominal terms, before adjusting for inflation. The Agg index has suffered the biggest drawdown on recorded history, in depth and length, and inflation is adding insult to injury. Coming from very low rates, it has been very difficult to keep purchasing power in this bond market, and if the Fed cannot continue lowering interest rates, it will be very tough to make money, as it was during the 70’s.
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