View from the Observation Deck

1. The Consumer Price Index (CPI) has increased about 3.0% per year, on average, since 1926. The CPI-Headline rate, which measures all items, currently stands at 2.3%.
2. Monetary policy in the U.S. has been very easy for a number of years, in our opinion. The Fed has pumped trillions of dollars of stimulus into the economy to promote growth.
3. Historically, such efforts have resulted in higher levels of inflation. Inflation is the sustained increase in the general level of the prices of goods and services.
4. So long as inflation doesn't evolve into hyperinflation, higher prices can translate into higher corporate earnings. Corporate earnings are the key driver of equity prices over time, in our opinion.
5. From 1970-2011, there were 20 calendar years where the CPI-Headline rate was greater than 3% but less than 7%.
6. The S&P 500 was up in 15 of those calendar years. The index averaged 9.0% (not compounded) over all 20.
7. The S&P 500 plunged 37.0% in 2008 due to the global financial crisis. The CPI was up only 3.8%. The inflation pressure in 2008 came primarily from the first half's spike in commodity prices.
8. From 1926-2011, the S&P 500 posted an average total return of 9.8%, according to Ibbotson Associates/Morningstar.