our stocks and inflation

I have not seen a discussion yet here of the impact of a sustained period of inflation on our stocks. I know we have had inflation scares before over the past 10-20 years, but we have not had serious 1970s style inflation since, well, the 1970s. It seems, though, that the risk of that happening is greater than ever because of an increasing sense among economists and US policymakers and politicians that deficits don’t matter. As a friend of mine who ran the fixed income business of a major bank told me recently regarding inflation “once the genie is out of the bottle it can be hard to put it back in.”

I am not so interested in having an extended discussion here on whether we will or won’t have inflation. Instead, I want to try to understand what the impact would be on our stocks if there is. The standard thinking seems to be that value should outperform growth in an inflationary environment because future expected revenues will be worth less (they will get inflated away.)

This thinking seems to me very silly in light of our stocks. If they are selling things people want, they will be able to charge more for those things, right, so projected $50B in next year’s revenue, if inflation hits 5%, will become $52.5, no? It seems so obvious, so why do our stocks keep getting hammered every time there is a bond selloff driven by fears of inflation? What am I missing? Is the market really so dumb?

5 Likes

The standard thinking seems to be that value should outperform growth in an inflationary environment because future expected revenues will be worth less (they will get inflated away.)

This thinking seems to me very silly in light of our stocks. If they are selling things people want, they will be able to charge more for those things, right, so projected $50B in next year’s revenue, if inflation hits 5%, will become $52.5, no? It seems so obvious, so why do our stocks keep getting hammered every time there is a bond selloff driven by fears of inflation? What am I missing? Is the market really so dumb?

We try not to discuss macro here, so please, no more replies unless you want to take this to email, off board.

I think it is a good question, though, so I’ll give a quick answer. The market isn’t dumb, it is just prone to over-correction. It’s a bit jittery. When everything looks like smooth sailing it can’t bid our stocks up enough. When there’s any pull back, they pull back way more than they should. The market should adjust slightly each day, but it swings pretty wildly. If that’s dumb, well, it’s dumb. But that’s just how it works.

Again, please take any further discussion on this off board. Thank you.

Bear
Assistant Board Manager

23 Likes