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?