Inflation Rose to 3.7% in September. Is It Time to Sell the S&P 500?

Inflation skyrocketed to 3.7% in September, leading investors to question whether it's time to sell the S&P 500. However, examining historical data reveals that high inflation hasn't always been detrimental to the index. After analyzing 908 months since 1950, it was found that 69% of months with inflation at 3.5% or higher saw the S&P 500 rise over the next year, with an average gain of roughly 7%.

Conversely, months with inflation below 3% saw the index close higher in 79% of cases, with an average gain of about 11%. Even when inflation was at the lower end of the "hot" range (3.5% to 5%), 70% of the time, the index still closed higher the following year, with an average gain of around 7%. The analysis also revealed that high inflation was more prevalent during the 1970s and 1980s, a period when inflation routinely exceeded 14%.

Additionally, the impact of inflation on the S&P 500 varied depending on the timing within the inflation surge. For instance, inflation exceeding 3.5% in the spring of 2021 preceded a lower index a year later, but readings around the June 2022 peak of 9% led to gains. This highlights the challenge of predicting a single reading's impact.

Higher inflation can also lead to elevated interest rates, negatively affecting stock valuations. However, for long-term investors, the historical data suggests that a 3.7% inflation reading is not a strong reason to sell an index fund, as the index still outperformed in about two-thirds of the cases a year later, with an average gain still being a gain.