6 replies to this topic

[Tor]

I read on the one hand that stocks are an inflation hedge, mainly growth stocks. On the other hand I read P/e's tend to contract as inflation pressure builds and interest rates rise. DO STOCKS TEND TO RISE AS INFLATION RISES, generally speaking? Anyone with views most appreciated. It is obvious now that inflation is in the pipe IMO. TIA.

[fib_1618]

It is obvious now that inflation is in the pipe IMO

Just like deflation was in this same pipe from 2002 to 2004?

The short answer to your question though is "it depends" on the time factor involved.

Longer term, total equity market return (price appreciation + dividends) has indeed been greater than inflationary growth over the last 80 years. If this wasn't the case, no one would buy stocks, and those holding would sell, creating a negative supply/demand ratio and lower prices over this same time period.

Intermediate term though, the answer would be different as higher interest rates that were created by these same inflationary forces would push stock prices lower as the higher cost of doing business would eventually have a natural negative effect on earnings growth, and lower dividends would come as a direct result.

And then there's the question of which kind of inflation actually puts this wheel into motion to begin with. Over the last couple of years the idea of higher fuel costs were thought to contribute to this, but it's been productivity that has been able to absorb this, while at the same time, the overall growth rate of the United States has remained minimally buoyant in spite of any comparable negatives we've seen in the past based on this same format.

But not being an economist, it does make good sense to me that until we see wage inflation (lower productivity) become a problem, longer term rates will remain stuck in a trading range, and because of this, equity prices should continue to provide a good parking place in money's effort to make more money...at least in the United States.

Fib

[toni]

I think it mainly depends on the rate of inflation. Mild inflation does not seem to deflate stocks, but rapid inflation does. toni

[Tor]

Thanks to all. I have found the answer I believe. It depends on whether it is cost push or demand pull. The former can actually be quite bad, the latter healthy and good. Oil price shocks was clearly a bad. I believe we are seeing demand pull, and that is why stocks are rising. Demand is pulling up commodity prices etc, and wages will likely rise quite dramatically at the skilled end. Employers are starting to hoard good staff.

[arbman]

The inflation in labor and material costs will increase the revenue of the companies while squeezing their profit margins as long as there are buyers out there since the companies will eventually try to pass these costs to the clients. Numerically, the inflation will eventually boost the profits or the stock prices, if the economy stays strong. However, the high inflation or hyperinflation almost always follows a deflation phase, even if the economy stays strong due to the sucking void created by the cooling in the liquidity. The hyperinflation is usually indicated by a decline in the currency rates and it is generally corrected once the excess liquidity (money and credit) gets absorbed by a growing economy or destroyed during a recession. So, what you should do is to watch the growth rate of the money supply and see whether the growth or income stocks are rallying better. The increase in the money supply or inflation has to certainly happen with a rally in the tech, consumer and financials in order for the prices to stick. While a rally mainly in the energy, utilities and health care will mark an inflationary blow off and a deflation or correction should follow. You need to see whether the money is rotating from a sector to another or leaving the markets during the corrections. The rallies that follow only by the industrials after the growth issues are the early indications of a tired bull and the further inflation at that point will eventually choke them all with the soaring material and energy prices. However, there are instances where the excess money wrongly flows back into the speculation (tech etc), usually in the large caps, which would mark an important top once the growth rate of the money supply starts to decline... - kisa

Edited by kisacik, 18 June 2007 - 06:39 AM.

[arbman]

Current inflation expectations are similar to Dec 2002;

- kisa

[arbman]

I am not predicting another 2002-2003 type bear market decline, to be clear here, however these kind of sharp changes might call for an IT correction...

- kisa