Inflation’s Impact on Stock Market

Jun 22, 2022 Finance news

Inflation raises prices without increasing their value. Companies often inflate their financial numbers. The number of shares they issue goes up with the rate of inflation and increases with the added value the company creates. As a result, it becomes harder to determine a stock’s true value. Inflation is fought with short-term interest rates. These rates are higher because they make it expensive for money to be borrowed, removing excess capital from the market.

Dividend-paying stocks

The recent rise in US inflation and the Federal Reserve’s decision to raise interest rates has many investors on edge, and they’ve been putting money into dividend-paying stocks. While these stocks have historically provided higher returns and more income protection, this approach can be risky and may limit diversification. To assess this issue, we should take a closer look at academic research and compare the benefits and risks of investing in dividend-paying stocks.

First, you should understand why high inflation is bad for stock prices. Low inflation lowers interest rates and raises spending. When the economy is strong and inflation is low, stocks with stable dividends tend to do better. This is because a higher inflation rate lowers the present value of dividends. However, an increase in interest rates can have a negative impact on share prices. Inflation can also cause falling share prices in international companies. If companies raise prices too much, they risk becoming uncompetitive with foreign players.

Energy stocks

With oil prices so high and the COVID-19 outbreak threatening global production, the impact of rising inflation on energy stocks isn’t surprising. Energy stocks have performed well during periods of high inflation in the past. In seven of the last nine high inflation cases, energy stocks outperformed the S&P 500 aktienindizes by a median of 14 percentage points. But the government’s actions aren’t leaving many safe havens for investors.

DVN’s base plus variable dividend model means that any extra cash should flow into the hands of investors. This cash can be used for buybacks and special dividends. If oil prices fall to $30 a barrel, investors shouldn’t worry about DVN’s base dividend. DVN is one of the best energy stocks to buy into for the long-term, with low near-term debt and plenty of liquidity on the balance sheet.

Growth stocks

According to conventional Wall Street wisdom, rising inflation is bad for technology and growth stocks. Yet, individual investors are still stampeding into the shares of these buzzy stocks. Using the VandaTrack measure of net purchases, these companies have enjoyed explosive price gains this year. As inflation increases, earnings estimates for growth companies will also be reduced. The rising cost of goods and services will also affect growth stocks’ valuations.

While value stocks have strong cash flows, growth stocks don’t yet have much cash. In addition, growth stocks need to borrow money to expand their business. Therefore, rising inflation erodes growth stocks’ profits. If you’re a growth stock investor, you need to consider the long-term view of your investment. Inflation increases the cost of borrowing for growth stocks, which in turn affects the company’s earnings.

International companies

The fear of higher inflation continues to loom over the stock market. For months, investors were under the impression that the worst had passed. Despite scattered signs of moderation, many investors were confident that policymakers would be able to rein in price increases without sinking the economy. Unfortunately, a report released Friday showed that inflation actually picked up a bit in July. Consumer prices increased by 8.6 percent, a much higher rate than last year.

While the stock market generally lags behind inflation, some industries are more vulnerable than others. For example, luxury goods manufacturers and oil and energy suppliers may be more insulated from higher prices. However, as more countries struggle to meet their basic needs, globalization has pushed up prices. Ultimately, higher inflation can put a strain on a company’s balance sheet. Inflation is not necessarily bad for all companies, but it can have a significant impact on the stock market of international companies.

Bonds

Inflation can have a big impact on index-charts, but there is good news for investors. While inflation has historically accompanied increased stock prices, it is not always a negative force. Generally speaking, stocks are favored over bonds by lower inflation, as rising inflation dampens the appeal of bond coupon payments. Rising inflation also reduces the present value of fixed cash flows. Moreover, higher inflation increases the debt burden of bond issuers, which may curb investment spending.

While consumers are the primary engine of the U.S. economy, they have been struggling to keep up with rising prices. Combined, these costs have forced retailers, grocers, and wholesalers to reduce profit margins. These companies have not yet passed these costs on to consumers. With this in mind, they may see their operating margins shrink and earnings crack. This is not good news at a time when profits are at an all-time high.

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