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  • Writer's pictureIshfaaq Peerally

Why Inflation is bad for stocks

💸 𝙏𝙝𝙚 𝙞𝙣𝙛𝙡𝙖𝙩𝙞𝙤𝙣 𝙧𝙖𝙩𝙚 𝙞𝙨 𝙘𝙪𝙧𝙧𝙚𝙣𝙩𝙡𝙮 𝙖𝙩 𝟰.𝟮% and the Fed is telling us that this is just transitory inflation because the economy is overheating. But investors are not convinced and stocks $SPX500 , especially tech stocks $NSDQ100 are not doing great. Last year we had monetary inflation and investors were happy but not this year, why is this the case?

With zero interest rates and Quantitative Easing, cash is cheaper and riskier assets such as stocks and bonds are more attractive. But bond rates are so low today, that even they are not attractive anymore. That's why stocks were the real winners from the 2020 monetary and asset price inflation. 𝙨𝙩𝙤𝙘𝙠𝙨 𝙬𝙚𝙧𝙚 𝙩𝙝𝙚 𝙧𝙚𝙖𝙡 𝙬𝙞𝙣𝙣𝙚𝙧𝙨 𝙛𝙧𝙤𝙢 𝙩𝙝𝙚 𝟮𝟬𝟮𝟬 𝙢𝙤𝙣𝙚𝙩𝙖𝙧𝙮 𝙖𝙣𝙙 𝙖𝙨𝙨𝙚𝙩 𝙥𝙧𝙞𝙘𝙚 𝙞𝙣𝙛𝙡𝙖𝙩𝙞𝙤𝙣.

This year we're seeing Consumer price index (CPI) inflation and this affects everybody, not just people who own financial assets. Normally higher and increasing CPI inflation is not good for stocks. Why?

🏦 It is because 𝙞𝙣𝙫𝙚𝙨𝙩𝙤𝙧𝙨 𝙚𝙭𝙥𝙚𝙘𝙩 𝙩𝙝𝙚 𝙁𝙚𝙙𝙚𝙧𝙖𝙡 𝙍𝙚𝙨𝙚𝙧𝙫𝙚 𝙩𝙤 𝙖𝙘𝙩. According to their dual mandate, they have to keep inflation and unemployment rates low. By inflation here, we mean CPI inflation. If inflation rises, the Fed will be forced to raise interest rates and higher interest rates are not so good for businesses and for stocks.

Normally higher interest rates are good for bank stocks $JPM , for value stocks and for commodities $GLD $GOLD .

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