Is recession coming in 2023? Market behavior in times of high inflation

 

There are so many opinions on this topic! 

I have no opinion, because really I don't know. 

But since we have high inflation, I wanted to see, how markets behave during times of high inflation. 

This is the SPX chart for the last 100 years (from microtrends.net). 

The first graph is logarithmic, shows recessions in gray and  is NOT adjusted for inflation. It is just nominal price.  

I drew in yellow rectangular "boxes" where the SPX didn't move much up. 

I put the about 45 degree yellow lines between the boxes in areas when the market moved up. 

It is interesting that the boxes and the lines are similar size in duration. Looks like the market is going up in steps. 

In the image below, I highlighted the years with high inflation. 

One thing I can see that during times of high inflation the markets don't go up in a 45 degree line. They stall. 

Now, I compare it to a chart which is ADJUSTED for inflation.

The highlighted inflationary areas are declining, which means that the real returns are declining in times of inflation. But due to inflationary increase in prices, the non-adjusted returns are flat. 

By the way, officially the inflation in 2007 was 4.1%, which probably should be highlighted too. 

Based on this, the same might happen again. In times of higher inflation the markets will stay flat overall, but the real returns will decrease.

The image below is just a projection. Who knows what is going to happen. 

But if at least the nominal value will not go down much, will make it less painful to look at the the markets.