Inflation does not always have to be negative for equity markets
3 min readIn recent weeks, both foreign and domestic media have been flooded with information about rising inflation, impending recession and their negative impact on the global economy and financial markets. Inflation is at 40-year highs, prices of commodities, fuels and services are rising and central banks around the world are raising interest rates to reduce inflation. However, as the newspaper pointed out CNN even in this case inflation is not the only one responsible for the declines in the markets and the reality is more complex.
Positive inflation for financial markets
Examples from the past show that investors have been able to maintain stock prices despite rising inflation. What Wall Street traders really hate are surprising negative news and shocks where we are sure the market will react with a decline. If, for example, central banks claimed that inflation was only a temporary phenomenon, the markets counted on this information and we did not see dizzying movements on the indices.
Transitory inflation is a financial stimulus for the markets, therefore the thesis that rising inflation = declines in the markets does not apply. Increased inflation plays an important role in higher returns in the market, he informs Michael Batnick from Ritholtz Wealth Management.
Inflation can even contribute to better results in the stock market, which he confirms research by the Leuthold Group. Research has shown that as long as inflation is rising, stocks tend to do very well immediately after reaching the highest rate. When the inflation rate is 8% or higher, the slowdown in inflation is usually associated with year-over-year gains in stocks. Therefore, according to BlackRock’s report, the shares can be classified as an excellent tool and hedge against inflation:
“We believe stocks are one of the best places to be in a world of rising inflation,” he said in the report Tony DeSpirito, CEO of BlackRock. However, as inflation increases, the market becomes more volatile and trading becomes more difficult.
Patience
Despite the short-term positive effect of higher inflation, which can have a positive effect not only on stock growth, but also on the energy or health sector, as long as it manifests itself in the economy for a longer time and is related to other negative factors, such as the current pandemic, the war in Ukraine and sanctions from by the Western powers, can cause in the markets turbulent drops.
We know from past behavior that the largest indexes can fall as much as 50% from their highs. Investors were also shocked by the admission of the representatives of the FED and the ECB, who announced after months of increasing inflation numbers that they were wrong in saying that inflation is temporary and, on the contrary, everything points to the fact that it will stay with us longer.
For investors, even in times of uncontrollable inflation, on the threshold of recession and the threat of stagflation, it is important to be patient and not succumb to the ubiquitous panic. Markets are not an example of human rationality, rather they are the exact opposite. They react to every negative impulse without considering the reality and objectivity of the risks.
If we include speculation and greed, it turns out that expecting reasonable behavior of investors in the current conditions is a false assumption. According to an analysis published in CNN, those who are patient and withstand all pressures become winners.
