With inflation spiking as the world adjusts to the post-Covid regime, investors are naturally interested in how their portfolios might perform in an inflationary world. In this piece, we investigate the performance of high-quality equities during prior bouts of inflation. We note that quality stocks have tended to fare well compared to the broader markets in times of rising prices, and that paying attention to valuation alongside quality delivered even better results. We conclude that the fundamental characteristics of our Quality Strategy’s holdings today further underpin the ability of our investments to withstand a possible inflationary episode.

Several years ago, we extended our database of company accounts all the way back to the 1920s. This was hard labor, or as hard as clerical labor gets. We waded through thousands of pages of dusty Moody’s Manuals, processing and entering revenue and leverage data for hundreds of American companies by hand. The objective was to be able to run our quality and valuation proxies back almost a century so that we could investigate the attributes of quality stocks under different environments. As a result, we are well placed today to investigate how quality businesses performed when inflation struck in the past.

We identified eight periods in which U.S. CPI remained above 5% for a period of one year or longer and tracked the returns of the highest-quality stocks, the cheaper high-quality stocks, and the S&P 500.1 The annualized returns laid out in the table are striking.


Source: GMO


In historic bouts of inflation, we see that:

  • High-quality stocks beat the S&P 500 in six of the eight inflationary periods.
  • Cheaper high-quality stocks beat the S&P 500 in seven of the eight inflationary periods.

High-quality won in most inflationary periods, and one can make the case that the only serious miss, in the early 1970s, was unrepresentative. This period saw the peak of the Nifty Fifty bubble in which many quality businesses were pushed up to unreasonable prices. Considering valuation alongside quality yielded much better, market-beating results in that period and is also a better proxy for our investment process today.