According to a recent study by The Leuthold Group, stocks have performed strongly -- up an average of 18.2% annually -- when the CPI was flat to down 2.49% on a year-over-year basis. The Leuthold study cross-referenced consumer prices with stock market performance on a quarterly basis going back to 1926.
According to Andy Engel, a senior research analyst at Leuthold, the 34 periods with mild deflation tended to exhibit strong stock market performance because of the market's anticipation of improving economic fundamentals. Twenty-one of the 34 mild deflationary periods occurred during the 1920s and 1930s. However, when deflation was more severe, stocks lost an average of 6.6% in the following 12-month periods.
Click here for a summary of the Leuthold study from InvestmentNews.com.