During the opening week of January 2022, the S&P 500 hit its all-time high of 4794, and though investors were jubilant, the huge, pandemic-driven run-up brought a daunting downside. Valuations were so stretched that using the most reliable projections, the probable returns on both U.S. big-cap stocks and government bonds were likely to lag, or barely match inflation over the coming decade, even though the consumer price index sat at its most becalmed in recent history.
A year later, inflation’s roaring and will likely stay far more elevated in future than the fixed income markets were anticipating just after New Year’s of 2022. Yet the sweeping global selloff that has hammered the S&P and Nasdaq Composite by 20% and 34% respectively from the start of last year through Jan. 5, and even pummeled such out-of-favor choices as emerging markets and U.S. small-caps that lagged the big rally, has shrunk prices to the point where investors can garner returns that beat the long-term trajectory of consumer and producer prices by a decent to wide margin, depending on the category. In especially cheap areas such as emerging markets and European stocks, gains should exceed inflation by 7% or better.
