The two main effects of inflation on the stock market
can impact the stock market in two main ways…
The first is that company profits can come under pressure.
The second is that what investors are willing to pay for these profits changes.
Historically, periods of severe inflation (or hyperinflation) are bad for shares.
The impact of severe inflation on shares
When companies face period of severe inflation, they struggle to contend with rising input costs. For example raw materials rise in price along with wages.
These businesses then face the problem of passing these costs onto their customers at a rate needed to combat the severe inflationary environment.
This results in companies with margins under pressure, Cris Sholto Heaton in Money Week
A positive of high inflation is it offsets fixed costs. Fixed costs include rental agreements and debt repayments.
But high inflation leads to the growth of company profits lagging behind inflation. And during times like this, there will be worries about the economic outlook.
This can lead to investors selling out of stocks and turning to hard assets instead, like gold, other commodities and property. This results in the valuations of stocks falling.
In real terms (when adjusted for inflation), stocks markets can rack up huge losses.
What happens when severe inflation becomes hyperinflation?
If severe inflation steps up to hyperinflation, this can be good news for the stock market.
This is because investors who’ve stayed in cash and bonds see the value of these assets tumble, so they turn to the stock market. In many instances when there’s hyperinflation, the local currency will also be weakening.
This results in investors taking their money and putting it to work overseas.
What is the best inflation environment for stocks?
Stocks appear to perform best in a mild inflationary environment. Looking at the S&P 500’s returns from 1926 to 2009, this was certainly the case when inflation hovered between 0.1% and 3%.
So there you have it, the impact of inflation on the stock market.
*********** Recommended Product ************
When should you mix business with pleasure?
Do you enjoy a Saturday afternoon of sport and great company?
Would you like to be part of a small group of people are making profits of R4,100 in just 4 days – for less than 10 minutes’ work per week!
If you said "Yes" to both these questions then you can certainly mix business with pleasure!
Today, you can discover how you can make fast, big gains from your favourite sports...
99.9% of people can’t even spot these opportunities, let alone act on them.
Let the Value Hunters lead you step-by-step to huge profits in 2012!
Click here for more information!