Will Inflation Hurt Stock Returns?
By: Curt Stowers
Does inflation hurt market returns?
In short, NO! Take a look at the chart below:
Since 1991 the weakest returns in the market were aligned with the LOWEST inflation and 23 of the 30 years saw positive returns even after adjusting for inflation.
So is Inflation Good for the Market?
Personally, I would not go down this path. Rather, I would say that inflation is a non-issue when it comes to the markets. My rationale is as follows:
- Inflation means higher prices / we pay more
- If we pay more, companies collect more
- If companies collect more, sales go up
- If companies maintain margin PERCENTAGES AND the market PE ratio remains constant the effect on market prices is neutral
So Why Does the Market Go Up?
In short, because knowledge goes up! Companies are nothing more than a collection of people and processes committed to a goal. And humans are amazing!
We continually transform our world, and, in the process, we create additional value. The price of a stock is the market weighing in on the value created by that business.
As we’re constantly “pouring in” new knowledge, we’re seeing the valuation of the market go up.
Keep in mind, however, that companies that are NOT bringing new knowledge into play are likely going to go DOWN in value over time.
While I may not win a Nobel Prize for this insight, it definitely aligns with what I have seen in practice, and it passes my “sniff test.”
You can see a bit more information on this topic here.
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