The inflation vs deflation debate continues. A previous article discussed the social and economic themes observed during the Weimar hyperinflation, as documented in the book “when money dies”. Some of the observations of the stock market at the time may help inform us about what may lie ahead.

What charts don’t tell you about stock market returns

S&P500 chart over 148 years

The above long term chart of the S&P500 looks pretty impressive, however stock index charts do not tell us the whole story.

Stock indices don’t necessarily reflect the economy (particularly recently). Also, these indices don’t reflect the performance of individual stocks within the index. The chart also don’t account for dividend yields and the effect of reinvesting returns. Taxation occurs at various points during the trading process (e.g. in UK stamp duty is charged when buying stocks, and capital gains tax on any profits when selling stocks. Some countries charge an annual tax for holding foreign stocks). Stock index charts don’t include fees data (e.g trading fees, management fees, foreign exchange fees).

The important factor that very few people consider is the purchasing power of stock market gains.

Inflation and stock market returns

A study by Eddy Elfenbein analyzed the after inflation return for each month between 1871 and 2010. When the annualized inflation rate for the month was below 5.3%, the real stock market returns were positive. However when the annualized inflation rate for the month was above 5.3%, the real returns were negative. This relationship held up for over 140 years. Historically the monthly annualized inflation rate has been above 5.3% for about a third of the time over the past 140 years. If you were to look at the chart of the S&P 500 during the inflationary period in the 1970s, the index was moving sideways with an upwards slant, but according to this study the real return was negative over that time. That means that the rise in the index was an illusion.

Merval Argentina stock index

Looking at the above chart, anyone who invested in 2013 appeared to do exceedingly well. This is the chart of the Argentinian stock index. In Argentina, inflation is running high, leading us to question how real these returns are in terms of purchasing power. One method of determining this is to index the stock index and consumer price index (CPI) to 100 at a specific time point.

2020 value (indexed to 100 in 2011)
Stock index1,100
Indexed returns in 2020 for stocks and gold in Argentina relative to CPI

The above table shows that Argentines who invested in the stock market gained purchasing power. Those who invested in gold significantly outperformed stock investors, both nominally and in terms of purchasing power.

Caracas stock index in USD official rate (green) and real rate (blue)

The above chart shows the Caracas stock market returns for 2015. This illustrates how apparent returns can be distorted depending on how it is measured. When priced in official rate US dollars, the return appears to be very good, but when priced in real rate US dollars, a loss is shown.

Hyperinflation and stock market returns

Purchasing power of assets in Venezuela

The Venezuelan currency is hyperinflating. The Venezuelan stock market chart looks great but when compared to the wholesale price index, the returns are losing purchasing power quite substantially. This contrasts with gold which has gained in purchasing power.

Consumer price index during Weimar Republic hyperinflation (Source: Goldonomic)

During the Weimar Republic hyperinflation, the indexed CPI went from 100 to 10,000,000,000 in 2 years.

Weimar Republic stock market returns in Marks (black) and US dollars (Green) (Source: Gold Eagle)

he stock market priced in Marks that shown with a black line that seemed to only just keep up with CPI however when priced in terms of US dollars it actually lost purchasing power quite significantly

Weimar republic gold and silver price (Source: Gold Eagle)

The above chart shows that both gold and silver performed very well during the Weimar republic hyperinflation, outperforming stocks by a factor of 10.

We can conclude that during significant inflation, stock market returns may or may not keep up with purchasing power, whereas gold always maintains, or even increases in purchasing power.


A rising stock market in nominal terms does not equate to rising or maintained purchasing power. Indeed during hyperinflation, the stock market returns can be phenomenally high in nominal terms, yet losing purchasing power in real terms. Hence the illusion.