What is inflation?
Let us quickly understand what inflation is. Inflation is the rise in the price of goods and services we use, reducing the consumer's purchasing power or what a consumer can buy with each currency unit. Now let's dive deep into how inflation affects the stock market and how can we position ourselves as investors during high inflation periods.
How inflation affects the stock market?
In general, a rise in inflation hurts the stock market. Let me try to explain in simple non-financial terms why it happens. Various factors contribute to this phenomenon, and together they bring down the stock market.
How can we position ourselves as investors during high inflation periods?
Now the question comes how we can position ourselves as investors during high inflation periods. I have discussed it in detail in my article here. To give you a summary, as a long term investor, one should not give much thought to inflation or rise in interest rates but focus on buying good businesses and holding them as long as you can.
How inflation affects companies
The headline inflation rate obscures some of the wide variations in price increases (or even decreases) across various industries. Just as it’s important for consumers to calculate a “personal” rate of inflation, investors should consider how higher inflation could impact the stocks in your portfolio.
The case for ignoring inflation altogether
Just as the market has seemingly brushed off concerns about inflation this year, there’s a case for investors to do the same.
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How inflation affects companies
The headline inflation rate obscures some of the wide variations in price increases (or even decreases) across various industries. Just as it’s important for consumers to calculate a “personal” rate of inflation, investors should consider how higher inflation could impact the stocks in your portfolio.
The case for ignoring inflation altogether
Just as the market has seemingly brushed off concerns about inflation this year, there’s a case for investors to do the same.
Inflation and The Value of $1
Growth vs. Value Stock Performance and Inflation
- Stocks are often subdivided into value and growth categories. Value stocks have strong current cash flows more likely to grow slowly or diminish over time, while growth stocks are likely to represent fast-growing companies that may not be profitable.12 Therefore, when valuing stocks using the discounted cash flow method, in times of rising interest rates, growth stocks are negat…
The Bottom Line
- Investors try to anticipate the factors that impact portfolio performanceand make decisions based on their expectations. Inflation is one of the factors that may affect a portfolio. In theory, stocks should provide some hedge against inflation, because a company's revenues and profits should grow with inflation after a period of adjustment. However, inflation's varying impact on st…