Will Higher Inflation Sink Stock Prices?

According to a recent CNBC survey, inflation is tied with COVID-19 as Americans’ biggest concern. And investors want to know: Will higher inflation and higher borrowing costs negatively affect stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. prices? Here’s what Research Analyst Liz Laprade said in our recent webinar, Booster Shots, Market Shocks and the End of Fed Intervention:

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Liz Laprade

Will higher inflation sink stock prices? We can see by now that inflation isn’t as “transitory” as the Federal Reserve had formerly suggested. A lot of that is coming from supply chain backlogs pushing up prices of things like shipping and groceries. We’re starting to see it seep a little bit into services as well. It’s possible that if there is higher inflation running longer and hotter, the Fed may raise interest rates sooner than many had originally anticipated. That can actually be a good environment for stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. and for investors who want to earn a return higher than inflation and the rate of return on risk-free bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates..

That’s hard to achieve with bonds alone, so you could see investors shift away from bonds into equitiesThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid., pushing up stock prices. In other words, I don’t equate high inflation and high interest rates with a poor stock market return.

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