How Inflation Fuels Bargain Hunting

Heartland Advisors Value Investing S&P 600 Quintile Chart

Source: Kailash Capital, LLC, Yale University, Compustat.

The chart above shows S&P 500 P/E from 1/1/1935 to 4/30/2022. Note: Data prior to 1983 derived from Yale University, Post 1983 data derived from Compustat. Price/Earnings Ratio of a stock is calculated by dividing the current price of the stock by its trailing or its forward 12 months’ earnings per share. Consumer Price Index (CPI) is the most widely used measure of consumer price inflation. The CPI measures the average change over time in the prices paid by urban consumers for goods and services. The Bureau of Labor Statistics (BLS) of the U.S. Department of Labor collects the CPI price information and calculates the CPI statistics. All indices are unmanaged. It is not possible to invest in an index. Past performance does not guarantee future results.

Late last year, investors who were clinging to the hope that inflation might be temporary took solace in the fact that real Treasury yields remained negative, a sign that bond investors might not be that worried about inflation. At the time, we posed the question: What if the predictive prowess of real Treasury yields was missing the mark? And what if inflation is here to stay?