Effect of Inflation on the Stock Market
Website design By BotEap.comDuring the era of the 1920s, 1950s, and 1980s, which was characterized by massive economic performances, stock prices also skyrocketed. Therefore, it was believed that an environment of strong economic growth coupled with low inflation would make the stock market breathe easy. But the point is, well, ‘inflation’! Investment and market analysts are always suspicious of incredibly high economic growth and terrific job reports. They are full of fear and apprehension that this artificial recovery or inflationary boom in the economy is being helped by the government’s “easy credit” policy. It creates huge federal deposits and substantially expands the money supply. During inflation, this economic growth is unsustainable and stock markets face an inevitable crash as federal agencies will have to tighten the rope sooner or later.
Website design By BotEap.comMost investors don’t really enjoy an investment profile that involves high interest rates and companies raising prices. Stocks are considered a great hedge against inflation, as the respective company’s revenues and profits grow at the same rate as inflation.
Website design By BotEap.comCompanies react to inflation by raising their prices, generally there are others that find it difficult to stay in the global market and compete with foreign producers that do not raise their prices. Rising prices fueled by inflation steal from investors as there is no corresponding increase in value. This also has a corresponding implication. The company’s finances are overestimated as a result of inflation, since revenues and profits also increase at the same rate as inflation and this in combination with the additional value that the company generates.
Website design By BotEap.comNow, when there is a decrease in inflation, previously inflated profits and income are also deflated. When a large amount of money chases goods for which supply is less, it is a classic case of inflation. So the option is to make the money more expensive to borrow. Excess capital is removed and the cycle of rising prices is slowed down.
Website design By BotEap.comAs an investor, a substantial portion of your portfolio should be in fixed income securities. Since inflation erodes purchasing power, fixed values are the best option to counteract market volatility. Retirees are even encouraged to keep a portion of their assets as a stock investment. Stocks that are sensitive to interest rates should be handled with extreme caution during the inflationary period.