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Poco Loco | How does inflation affect the stock market? |
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jeff410
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When inflation rises interest rates usually rise and money flows out of the stock market into interest bearing investments. Higher interest rates also make money more expensive to borrow so it makes it harder for companies to do business if they need a credit line. It raises their cost of debt capital. So, they have to earn a higher return to maintain the value of the company. All that depresses stock prices. |
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Founder, MastersoEquity.com
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There are many academy theories to this question but the reality is simply this... as long as inflation becomes a concern (even if there is no significant indication of it coming to be), investors go into a panic because they are afraid the Feds may resume interest rate hikes and sell off. Period.
Just look back on the Dow whenever the CPI numbers turned up bad over the last 8 months and you will see what I mean.
http://www.mastersoequity.com
http://www.optiontradingpedia.com
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fcas80
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Think about a single company, and whether that company benefits or loses from inflation. Can that company easily pass along its higher costs to customers? Or does it have to absorb these higher costs itself?
Some companies become more profitable with inflation, and others less profitable. Presumably, both these conditions will ultimately be reflected in higher or lower dividends, and hence get reflected in the stock price. |
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Tom H
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You must "discount" the value of future corporate earnings more in a high inflation environment.
If you buy a whole company today that has a P/E ratio of 20, then it will take 20 years to pay-off the investment, assuming zero earnings growth. However, with high inflation, the earnings you receive 15 or 20 years into the future will be worth much less than today's dollars.
This is how higher inflation leads to "multple contraction" or P/E and stock price declines.
Consider growing companies in an environment with a 5% inflation rate. A company that has had consistent earnings growth at a 5% rate is essentially maintaining a zero real growth rate. Another company that has consistent earnings growth at a 15% rate has an effective 10% real growth rate. The latter company can maintain a higher P/E when inflation kicks-in, but the former company can't. |
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tmac5445
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Inflation is most often derived from economic growth. If supply cannot account for the economic growth then the prices the rise as a consequence. |
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charlotte q
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All i know i that the stock market does not keep up with inflation. that is why i hate having money in it |
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