Inflation Vs Dow Performance Since 1960

Since at least 1960 there has been a strong correlation between Inflation Rates and the performance of the Dow.

If we go back to the 1960-1980 time period notice each time the Inflation Rate rose above 4% this weas followed by a substantial correction in the Dow.  In the Summer of 1968 the Inflation Rate rose above 4% (point A) which was followed by a 10% drop in the Dow (points E to F).  Then by December of 1968 the Inflation Rate rose above 6% (point B) which was followed by another substantial drop (points G to H) in which the Dow lost 37% of its value from the Fall of 1968 through the Spring of 1970 (points E to H).

Meanwhile in the Spring of 1973 the Inflation Rate once again rose above the 4% level (point C1) which was followed by a top in the Dow (point I).   Furthermore the Inflation Rate ketpt rising and eventually got above 6% in the Summer of 1973 (point C).  Thus from the early part of 1973 through late 1974 the Dow lost 46% of its value (points I to J).   In addition in early 1977 the Inflation Rate once again rose above the 6% level (point D) which was then followed by a 28% drop in the Dow (points K to L)

Next if we look at the period from 1980-1990 the Inflation Rate rose above 4% in early 1984 (point A) which was followed by a 17% drop in the Dow (points D to E).   Then in 1987 the Inflation Rate rose above 4% in the Summer of 1987 (point B) which was followed by a 41% drop in the Dow in just 3 months (points F to G).   Furthermore by the Fall of 1990 the Inflation Rate rose above the 6% level (point C) which was followed by a 22% drop in the Dow (points H to I).

Finally if we look at the period from 1991 through 2008 the Inflation Rate did briefly rise above the 4% level in the Fall of 2005 (point A) however the Dow was above to avoid a major correction as it only dropped arond 5% (points C to D).   However in November of 2007 the Inflation Rate once again rose above the 4% level (point B) which was followed by a nearly 23% drop in the Dow (points E to F). 

The Inflation Rate for July was 5.6% and it appears the key thing to watch in the coming months is whether the Inflation Rate rises above 6% or not.  If the Inflation Rate were to rise above the 6% level that could be an ominous sign for the major averages which could lead to another significant downward move much like we have seen in the past.  

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Bob
Amateur-Investor.Net