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Blokland’s daily sketch

Blokland’s daily sketch

22-09-2020

Be careful what you wish for

  • Jeroen Blokland
    Jeroen
    Blokland
    Portfolio Manager

With its new symmetric inflation target, the Federal Reserve will allow consumer prices to (temporarily) overshoot the 2% level. If the Fed succeeds in creating such an overshoot, however, equities may actually struggle. Today’s chart by Deutsche Bank reveals an inflation level between 1% and 2% has historically been the sweet spot for stock market valuation, measured by the price-earnings ratio. This is likely due to the fact that inflation levels of between 1-2% do not immediately cause deflation worries, while at the same time forcing the Fed to stimulate more to get inflation up. If levels exceed 2% inflation, however, market valuations start to come down. Hence, an inflation overshoot of, let’s say, 3% could be troublesome for equities.

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As a senior portfolio manager I use charts to illustrate financial issues every day. I tweet my favorites as @jsblokland and was named 'one of the 50 most important people for investors to follow in 2018' by MarketWatch.
Previous editions of the daily sketch can be found on my personal financial markets blog. All graphics provided are collected from Bloomberg data and public websites. They do not always reflect my personal opinion and may also not necessarily reflect the opinion of Robeco. Please cite all references or quote the original source if replicating content.

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