To better understand how inflation impacts investors’ portfolios, we examined the sensitivity of equity returns to inflation over nearly 150 years, from 1875 to 2023. A rigorous analysis of inflation’s impact on investing requires this extensive history because periods of high inflation have been rare. Before the pandemic, global inflation had hovered around 2% for 50 years, never exceeding 4% from 1990 to 2020. In fact, there have only been a few periods of significant inflation in the past 150 years: the 1880s, after World War I, around World War II, the 1970s oil crisis, and most recently since the end of 2021.

To provide a more diverse view of options for investors’ portfolios beyond the broad stock market, we investigated the inflation sensitivity of common equity factors. These five equity factors — notable for their ability to outperform historically — are small caps, value, momentum, low volatility equities, and quality. We also combined these factors equally into a single multi-factor portfolio.

The Sensitivity of Performance to Inflation

Over the full period, equities returned 8.3% a year on average before inflation, with inflation averaging 3.3%. Notably, the five equity factors all delivered a performance premium (outperformed the broad market) with average annual returns ranging from 9.4% for small caps to 11.7% for momentum. The multi-factor portfolio yielded a robust annualized return of 10.6%.

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