the late 1970s an era defined by bell bottoms some big characters dubious fashion disco and
high inflation we cannot accept high rates of inflation as a permanent fact of american life
flares may now be a relic of the 20th century but some economists fear a return to high inflation
the likes of which have not been seen for more than 40 years inflation is on the rise inflation
inflation is a real concern and since the start of 2021 it has been rising steadily across the world
inflation could be a lot less temporary than some of the central banks seem to think it is we're
experiencing a number of novel developments that we have rarely observed in the past
the cause now to growing concerns about the deadly coronavirus the pandemic has created a set of
highly unusual economic conditions high inflation is detrimental to a healthy economy if it lasts
longer it will affect the stock market it will affect consumers it will affect the economy a lot
if inflation continues to rise what effect will it have on the stock market and your wealth
when covert 19 started global lockdown markets plummeted you must stay at home
do not travel abroad you could describe it as panic with investors dumping all sorts of risk
assets including stocks goodness look at those numbers there an economic shock of unknowable
scale is upon us fears of covey 19 grid the nation we were seeing fairly vicious falls
almost every day the pandemic disrupted global supply chains production lines came to a
standstill shipping stalled and air freight were grounded i think plenty of people thought that
this could well be the start of a bear market but within five weeks something extraordinary happened
the s p 500 which tracks the 500 largest companies in america had plummeted in march
2020 but it soon rallied and its value doubled over the next 18 months it felt like it almost
shrugged off the effects of the corona virus or factored it in very quickly and it was back to
business as usual lockdowns meant that people were spending less than before the pandemic
at the same time governments were taking unprecedented steps to recharge their economies
the single biggest economic relief the largest emergency
of stimulus for the agencies time in our history
the government is going to help to pay people's wages
in the us alone the government has allocated more than four trillion dollars on stimulus funding
congress adopted an approach that was aimed at supporting incomes of u.s families across
the u.s and the idea was that in the presence of massive job losses the key
intent was to support income all of this fiscal stimulus really supercharged consumer spending
we saw central banks lower interest rates so the cost of borrowing
is low and qe quantitative easing you know effectively pumping money into the economy
a lot of which finds its way into markets to try and prop up and avoid any sort of massive crash
john q has a private little nest egg his practical nature tells him it ought to do
more than collect moths in a world of low interest rates consumers look elsewhere for better returns
in their investments what are you going to do with your cash you don't want to leave it
in the bank if you sold off in the worry of a bear market you're getting not very much return
leaving it in a savings account so it's going to find its way into the stock market but the
pandemic limited the supply of goods and since economies have reopened supply has been playing
catch-up with that new-found surge in demand that has led to a rapid increase in inflation
we saw the categories like motor vehicles like cars see a rapid acceleration in prices and
in inflation it means your dollar or pound or yen won't buy as much tomorrow as it did today these
lines chart the price of the two most popular oil stocks west texas intermediate and brent crude
after falling to historic lows in april 2020 the prices of both types of oil have recovered sharply
we have not seen supply of oil come back to its precovet level we've seen restraint on
the front of opec and we've seen restraint on the u.s front in terms of oil production crude
oil prices and natural gas prices have really surged the heads of a number of central banks
have used cautious language this year saying that inflation is a transient thing or that we think
it's going to be temporary their right to calm fears psychology plays a role in all of this too
i don't know why i'm telling you this i'm a dentist you're the psychoanalyst
if consumers fear long-term higher rates of inflation
it can quickly become a self-fulfilling prophecy was that fair doctor
tell me honestly what you think as they quickly spend to avoid higher prices in
the future in that environment we are in what is called the price spiral and essentially
this risks having runaway inflation we're not in that inflationary psychology right now
traditionally central banks have controlled inflation by
raising interest rates which makes borrowing more expensive
their real fear is hyperinflation examples of which are strewn through history
in these cases currencies became worthless
no one is suggesting that any major economies are heading for hyperinflation
but any period of higher inflation does have a knock-on effect on the stock market
historically inflation can spell bad news for company stocks
take a look at the dow jones index it measures 30 of the best performing companies in the us
the red line charts its performance over the last 14 years between 2007 and 2011 when the us rate
of inflation thus the blue line moved above three percent the index reacted negatively first in 2008
when inflation spiked during the subprime mortgage crisis the dow lost almost half
its value and again in 2011 when an inflation increase was soon followed by a weaker index value
when it comes to periods of higher inflation markets and investing can get a lot trickier
some stocks traditionally outperform in times of higher inflation
duke university in north carolina recently published a paper looking at historical
returns over the past 95 years of different u.s equity sectors when inflation moved above 5
researchers focused on eight sustained periods of inflation from 1926 to 2020
when normal demand and supply patterns were jolted by global conflict we are determined to
preserve our freedom no matter what the cost oil embargoes oil reserves are running out revolution
and economic booms the legislative process to put america back on the road economic health is now
fully underway of course historical trends are never a guarantee of future performance but the
researchers found that across all sectors energy stocks delivered the best positive annual returns
companies that produce gas that produce oil that produce renewable energy they will all be thriving
during inflationary times but it is because inflation is caused by increase in energy prices
soft commodities such as corn wheat fruit or livestock have also historically held
or increased their stock prices and this is holding true today since january 2021 the three
best performing soft commodities have soared in price the researchers at juke university found
that commodities offered on average a 14 return on investments during periods of high inflation
historically the fate of bank stocks during periods of high inflation
has been hard to gauge how much are you going to start off with five shillings good
when inflation hits there is an expectation of an interest rate hike from central banks so in theory
banks should benefit from that because an interest rate hike makes it more profitable for banks to
lend money well i think we can make you this long will the bank need security no i don't think so
inflationary pressure however can also signal that an economy is in difficulty ideal conditions for
debt defaults to arise this seems okay banks are very very embedded in that economic cycle dynamics
so they actually might get hit by the sort of recession that may follow an inflation spike
then there are the less flashy age-old stocks which typically offer steady
but not spectacular growth rates these are known as value stocks as investors become
a bit more concerned about the economy and the effect that higher inflation could have on it
they could turn away from perhaps some of the more aggressive go-getter tech type stocks for example
and look to a more traditional blue chip dividend yield slightly safer play
we took a look at the top three growth stocks and the top three value stocks based on index weight
according to the s p growth and value index we studied the relationship between stock price and
inflation since 2007 when the rate of inflation moved above two percent the price of these growth
stocks tends to decrease more quickly than the price of the value stocks as the rate of inflation
increases technology stocks could suffer if we had higher inflation some of them anyway clearly some
of the big names if we take the likes of facebook amazon netflix google they weren't around in the
1970s when we had runaway inflation so it's difficult to know how they will be impacted
instead of focusing on potential growth in times of inflation
investors tend to look at how much leverage or debt a specific company or stock has taken on
value stocks are typically better placed in this respect
it's unlikely that rich economies are headed back to the kind of double-digit inflation
last seen in the late 70s i want to have a frank talk with you tonight about
our most serious domestic problem inflation
we are going to see some cooling of inflation but inflation is likely to remain persistently higher
than it was in the decade before the coveted crisis if we do see interest rates gradually get
ratcheted up that could be perhaps something of a bigger shock than stock markets were expecting
and could be a reason for people to perhaps head for the exits gradually on stock markets a more
likely scenario is a period of what's known as stagflation where inflation rises at the
same time as the economy slows either way there will be opportunities for traders and investors
78.77% of retail investor accounts lose money when trading with this provider. You should consider whether you can afford to take the high risk of losing your money.
to capitalize on the changing economic climate i'm david jones chief market strategist at capital.com
we've written a piece on how commodities value and growth stocks perform during
periods of higher inflation it's available on our platform click on the link and don't forget to
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