The spectre of inflation has spooked stock markets since the end of last year with headline rates in the US for example above 7% – the highest since 1982. The Bank of England this week suggested that the UK will see a similar rate by April.

There are clear reasons why this inflationary impulse has occurred. Central banks around the world have supported a significant increase in deficit spending through the purchase of government debt and so we have witnessed the biggest Keynesian stimulus since World War Two. The Federal Reserve has more than doubled the size of its balance sheet since the outbreak of COVID-19. Moreover, this massive monetary expansion has been accompanied, for the first time in history, by government policies to shut down large sectors of the economy and impose working practices that have made it impossible for businesses to function as normal.

The outcome has been supply-chain disruption such as we have never seen which, as economies have opened, has led to both price and wage pressure throughout the system. Commodity and basic materials have seen prices up 20-80% from their lows and wages in some sectors, especially hospitality, have been rising at more than 10% p.a.

There are signs that some of this pressure may be about to ease. Industrial production is stabilizing back to pre-pandemic levels, shipping rates are now collapsing, and basic material prices are rolling over (except oil and gas). There are also signs that wage pressure isn’t compounding quite as much as feared as labour participation rates pick up.

We wouldn’t want to get too confident on the inflation front but if it is close to a peak, what would this mean for investors?

Although several interest rate hikes from the Federal Reserve are now priced in and bond yields have moved up this year, we still face the most negative real (inflation adjusted) yields since the 1970s.

Looking through a long lens in this chart going back to 1928, when negative yields have reversed it’s been because inflation has fallen sharply, not because bond yields have risen.

Once that reversal happens and real negative yields bottom out, it’s generally been a good time to buy the stock market with a long-term view. The grey bars on the chart show the ensuing 3 years market performance from the month that real rates turn.

Moreover, as we wrote in Revival of the Fittest (2016), companies are living faster and dying younger. The average tenure in the S&P500 in 1960 was more than sixty years, today it’s closer to ten. Moreover, the concentration of cash flow amongst just a few companies is stark and the companies earning that cash flow are changing ever-more quickly.  Between 2000 and 2015 less than 60% of companies in the top fifty by cash flow managed to stay there the following year. The odds, on that basis, of staying  in the top-fifty cash earners for the whole fifteen years was 2,700:1 against. One should be more attentive than ever to a rapid change in fundamentals.

The lesson is simple but often neglected. Buy-and-hold is a comforting mantra, adapt-to-survive is more realistic.

As the chart shows, technology has been the biggest show in town for many years. In recent weeks, there’s been some reversal – the “old economy” heavy Dow Jones Industrial index has outperformed the tech-heavy Nasdaq by 11% in the last month for example. Does this mark a long-term change in market leadership? Possibly. If it does persist then we, at least, will adapt to the new regime.

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Most media I read and hear these days talk about these “unprecedented times” as if none of what we witness today has been seen before.

I wonder if its more to do with language than reality though. Some words just work well in pairs when it comes to describing events - unforeseen circumstances, unchartered waters - but precedented times, for some reason, doesn’t have the same ring.

As George wrote a couple of years back in The Anxiety Machine – The end of the world isn’t nigh, the tendency of the press to report news in an overly dramatic fashion, generally with a strong negative bias, is natural. As humans, we suffer a powerful cognitive bias towards overly dramatic, overly negative narratives. We have evolved to survive and so will always be more attentive to threats than good news. It is only natural, therefore, for the attention hungry media to focus on negative stories during these “unprecedented times”.

Although the combination of events in 2020 is unique, none of them on their own are materially different from anything we have witnessed in the last 100 years. A browse through the history behind our long-range US stock market chart (just scroll over the lines) reveals the never-ending barrage of fear which investors face. War, natural disasters, pandemics, mass unemployment, trade wars, debt fears, political crises, military coups, despots, and obsoletion all feature. So, however, does human endeavour, enterprise, new technology, global collaboration and the economic enfranchisement of huge swathes of the fast-growing global population.

The lessons from this simple chart are clear. Despite the news, stay invested for the long term and, whenever possible, re-invest dividends (click on the Linear button for the full effect).

None of what we see today is without precedent. For sure, we are witnessing an unusual cocktail of economic and political phenomena but perhaps they would be better described, in the spirit of P.G. Wodhouse, as merely a little less than precedented.