Inflation Surges to 4.2% - Should we be worried?

The big headline is that year-over-year inflation came in at +4.2%. What the headline leaves out is that inflation hit a period low in May 2020, meaning much of the inflation data we are seeing now is simply “catching up” to where things would have been if we had never had the 2020 recession. It also fails to mention that inflation almost ALWAYS runs higher during the recovery from a recessionary period.


  • More often than not, stocks appreciate in an inflationary environment
  • Cash loses value during inflationary periods
  • Inflation adjusted bond performance historically has been weak during periods of high inflation
  • Timing the market has proven an impossible task, often leading to underperformance
  • The U.S. CPI rose +0.8% m/m in April, with the core (ex food & energy) index up +0.9%. Used car prices spiked (+10.0% m/m) but inflation gains were broad-based as economic re-openings have created bottlenecks.
  • On a y/y basis, the headline CPI was up 4.2% and the core 3.0% (most since 1996).
  • There’s other global news indicating higher inflation. Consistent with the recent gain in commodity prices, China’s producer price index (PPI) rose in April.
  • Bottom line: in general central bankers have indicated they expect current price gains to be transitory. Fed Vice-Chair Clarida said this morning that the rise in April inflation surprised him. However, the weak jobs report last week was also a surprise. The duration & composition of inflation (rather than the number we pop up to) is likely to be a key focus. Rent inflation remained tame in the April report. If that changes, it will be much more difficult to keep calling the inflation move fleeting


It is true that the economy’s reopening and the increase in Money Supply (M2) are very likely contributing to “excess inflation,” but, this is NORMAL and EXPECTED. Below we have included charts showing the drop in inflation for the 2020 recession, the 2008 recession, and the 2000 recession. For the 2008 and the 2000 recessions we can also see inflation heating up during the economy’s recovery. In the charts below you can see it is quite normal for inflation to run hot after a recession ends.

Inflation and the S&P 500: 5/2019 to 5/2021

Inflation and the S&P 500: 5/2008 to 12/2010

Inflation and the S&P 500: 6/30/2000

So while headline inflation is an attention grabbing statement (after all, none of us really like high inflation), the big question for investors is not how high will inflation go, but rather, what will inflation do to investors’ net worth and their lifestyle. To answer these questions, we think it is helpful to review what happened in the twelve months following the “hotter” inflationary periods after a recession ended.

Inflation peaked in September 2005 following the 2000 recession. The chart below shows what the S&P 500, the Barclay’s Aggregate Bond Index, and inflation did for the 12 months following September 2005.

S&P 500, AGG, and Inflation: September 2005 to September 2006

The S&P 500 was up 10.8%, AGG (iShares Core US Aggregate Bond ETF) was up 3.3%, and inflation dropped from 4.7% to 2.0% (annualized rate). Looking back, between investing in stocks (+10.8%), investing in bonds (+3.3%), and moving to cash (+1.0%*), an investor’s best course of action during this period would have been to remain in the stock market. Looking at “real rates of return” for these three asset classes, meaning net of inflation, the only one of these three asset classes to produce a positive real rate of return was the stock market. To calculate the real return of an asset you need to subtract inflation from the rate of return. For the S&P 500, that was 10.8% - 4.7% (inflation) = +6.1%. For AGG, the result was 3.3% - 4.7% = -1.4%. For cash, the result was 1.0% - 4.7% = -3.7%. During this period, stocks did the best job of preserving investor net worth and lifestyle.

Following the 2008 recession, inflation peaked in December 2009. By December 31, 2010, the S&P 500 was up 15.6%, AGG was up 6.4%, cash (represented by the Schwab Cash Reserves Money Market’s average yield) was 0.8%, and inflation had fallen from 2.8% to 1.4%.

S&P 500, AGG, and Inflation: December 2009 to December 2010

Although both stocks and bonds produced positive real returns during this period, stocks dramatically outperformed bonds. Cash again produced a negative real rate of return.

Inflation peaked a second time after the 2008 recession in September 2011, and one year later the S&P 500 was up 30.2%, AGG was up 5.0%, and inflation had fallen from 3.8% to 1.9%. Again, both stocks and bonds produced positive real returns, but once again stocks dramatically outperformed bonds, and cash again produced a negative real rate of return.

S&P 500, AGG, and Inflation: September 2011 to September 2012

Much of the “fear” over inflation appears to stem from the market and inflation data from the early 1970s. Below is a chart showing the MSCI Total US Equity Index and Headline Inflation from September 1972 through December 1974. During the period, inflation climbed to 12.2% and the MSCI Total US Equity Index fell 33.6%.

MSCI Total US Stock Market and Inflation

Although many blame the drop in the stock market on inflation, the data does support this presumption. We can compare September 1972 through December 1974 with January 1977 through March 1980. These were two of the periods in recent US history with the highest inflation numbers. Below is a table comparing various data sets between the two periods. If “inflation” were to blame for the stock market tumbling, then January 1977 through March 1980 should have performed worse than September 1972 through December 1974, but it did not. It actually outperformed 41%.

This data suggests what we already intuitively know; the economy is complex and no single factor (inflation or otherwise) will determine its behavior. Many factors together are required to either push the economy forward or pull it backward. Further, when the economy (as measures by GDP) is growing, the stock market tends to perform better. When GDP is contracting, the stock market tends to perform worse.

With the exception of the 1987 flash crash, which recovered in 18 months, there have been NO other sharp, long-term drops in the US stock market that were not also accompanied by a sharp drop in (or negative) US GDP. This tells us that the question of the day is NOT so much what the inflation number is, but rather what will GDP do. With the economy continuing to reopen, capital expenditures increasing, a much higher money supply (M2), rising wages, a dramatic build-up in savings over the last year, record corporate margins, very high levels of corporate cash and very high free cash flows, we cannot imagine a sharp drop in GDP is on the horizon yet. This leads us to believe that although volatility is climbing, the market is not on the precipice of a prolonged, sharp drop, but rather is likely to keep grinding its way higher.

Please call us or email us with any questions that you would like to discuss.


Fortem Financial
(760) 206-8500


Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

Awards and recognitions by unaffiliated rating services, companies, and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Fortem is engaged, or continues to be engaged, to provide investment advisory services; nor should they be construed as a current or past endorsement of Fortem or its representatives by any of its clients. Rankings published by magazines and others are generally based on information prepared and/or submitted by the recognized advisor. Awards may not be indicative of one client’s experience or of the Firm’s future performance. Neither Fortem nor the recognized advisor has paid a fee for inclusion on a list, nor purchased any additional material from the award provider. The criteria for each award is listed below:

Five Star Professional Disclosure:
The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at:
Fortem Financial 2016. All rights reserved.

Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/ Market Data (oil spot price, WTI Cushing, OK); (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Forward looking statements are based on current expectations and assumptions, the economy, and future conditions. As such, forward-looking statements are subject to inherent uncertainty, risks, and changes in circumstance that are difficult to predict. Actual results may differ materially from the anticipated outcomes. Carefully consider investment objectives, risk factors and charges and expenses before investing. Fortem Financial is a registered investment adviser with the SEC. Advisory services are offered through Fortem Financial.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Fortem Financial


Fortem Financial Group, LLC, has adopted this policy with recognition that protecting the privacy and security of the non-public personal information we obtain about our customers is an important responsibility.

All financial companies choose how they share your non-public personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your non-public personal information. Even when you are no longer our customer, we will only share your non-public personal information as described in this notice. So, please read this notice carefully to understand what we do.

The types of non-public personal information we collect and share depend on the product or service you have with us. This information can include items such as your Social Security number and income, your account balances and transaction history, and your investment experience and account transactions.

We collect your non-public personal information in a variety of ways. For example, we obtain your non-public personal information when you open an account or give us your income information, tell us about your portfolio or deposit money, or enter into an investment advisory contract. We also collect your non-public personal information from other companies. For example, from the custodians who hold your account assets.

All financial companies need to share customer’s non-public personal information to run their everyday business. Below, we describe the reasons we can share your non-public personal information and whether you can limit this sharing.

We share your non-public personal information for our everyday business purposes such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, report to credit bureaus, to protect the confidentiality or security of your records, or as permitted by law. We may also share your non-public personal information for our own firm’s marketing purposes; so that we can offer our products and services to you.

Federal law gives you the right to limit only sharing non-public personal information about your credit worthiness for our affiliates’ everyday business purposes; sharing non-public personal information about you with our affiliates to market to you; and sharing non-public personal information with non-affiliates to market to you.

We don’t share non-public personal information about your creditworthiness with our affiliates for their everyday business purposes. We don’t share your non-public personal information with our affiliates to market to you. We don’t share your non-public personal information with non-affiliates to market to you. We also don’t share your non-public personal information for joint marketing with other financial companies. State laws and individual companies may give you additional rights to limit sharing.

We share non-public personal information with our parent company affiliate, Focus Financial Partners, Inc, for its internal and external auditing purposes. We also share your non-public personal information with a non-affiliate for the purpose of aggregating it and providing summary information based on this data to our parent company, Focus Financial Partners, Inc.

To protect your non-public personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings.

Our policy about obtaining and disclosing non-public personal information may change from time to time. We will provide you notice of any material change to this policy before we implement the change.

If you have questions please call us at 760-206-8500 or go to our website at


Fortem Financial Group, LLC ("Fortem Financial" or the "Firm") is a federally registered investment adviser with offices in California. Fortem Financial and its representatives are in compliance with the current registration and notice filing requirements imposed upon federally registered investment advisers by those states in which Fortem Financial maintains clients. Fortem Financial may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements.

This website is limited to the dissemination of general information regarding the Firm's investment advisory services offered to U.S. residents residing in states where providing such information is not prohibited by applicable law. Accordingly, the publication of Fortem Financial' website on the Internet should not be construed by any consumer and/or prospective client as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment, tax or legal advice. Furthermore, the information resulting from the use of any tools or other information on this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from Fortem Financial. Any subsequent direct communication from Fortem Financial with a prospective client will be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. Fortem Financial does not make any representations as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to this website or incorporated herein, and takes no responsibility therefore. All such information is provided for convenience purposes only and all users thereof should be guided accordingly.

All statements and opinions included on this website are subject to change as economic and market conditions dictate, and do not necessarily represent the views of Fortem Financial or any of their respective affiliates. Past performance may not be indicative of future results and there can be no assurance that any views, outlooks, projections or forward-looking statements will come to pass. Investing involves risk, including the potential loss of principal, and the profitability of any particular investment strategy or product cannot be guaranteed.

Any rating referenced herein may not be representative of any one client's experience. Further, the Firm's receipt of any rating is not indicative of the Firm's future performance. The Charles E. Merrill Circle of Excellence award is granted by Merrill Lynch for outstanding client service and satisfaction. The award is granted based on annual criteria established by Merrill Lynch for its top decile advisors. The Barron's Top 1,200 Financial Advisors rating of the top financial advisors in the United States is based on data provided by participating firms. The following factors are included in the rankings: assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. Investment performance is not an explicit component. The Five Star Professional award is granted by Five Star Professional and recognizes service professionals who provide quality services to their clients based on data provided by participating firms. The award is granted based on the following ten objective eligibility and evaluation criteria: credentialed as an investment advisory representative (IAR) or a registered investment advisor; actively employed as a credentialed professional in the financial services industry for a minimum of five years; favorable regulatory and complaint history review; fulfilled their firm review based on internal firm standards; accepting new clients; one-year client retention rate; five-year client retention rate; non-institutionalized discretionary and/or non-discretionary client assets administered; number of client households served; and educational and professional designations. Feedback from consumer surveys will augment a regulatory history review. Firms have the option to provide input on award candidates from their firm, regardless of the nomination source. The Palm Springs Life's "40 Under 40" Rising Young Professionals to Watch in the Coachella Valley is based upon nominations from the local business community and selected by the staff of Palm Springs Life.

For information pertaining to the registration status of Fortem Financial, please refer to the Investment Adviser Public Disclosure website, operated by the U.S. Securities and Exchange Commission, at, which contains the most recent versions of the Firm's Form ADV disclosure documents.