Inflation and stock market
Inflation
The intrinsic value of common stocks is determined by investors current expectations of just two factors.
Future interest rate and future dividends. Both factors are intimately tied to inflation.
Inflation is primary caused by an increase in the money supply that outpaces economic growth.
High inflation can be good, as it can stimulate some job growth, but high inflation can also impact corporate through higher input costs.
Types of inflation
Demand pull inflation:
It occurs when demand for goods is caused by increase in money supply in the economy or disposable income of individuals and they tend to spend more. The production increases to meet the demand . this elevate the performance of the companies. hence the value of stock price increase.
Cost pull inflation:
It occurs due to increase it cost of input materials and wages and not because of increase in market demand. The supply gradually reduces due to high cost, while demand would not increase as an expected level, there top line and margin will stagnant.
Effect of inflation
If, inflation Will go higher pace, central bank have to taken some monetary action to control the the money supply. Central bank has many tool such as CRR and SLR may increase some basis point. Interest rate increase control the money supply and will raise nominal interest rate. The nominal interest rate means, interest rates minuses by inflation. When nominal interest rate in higher pace, more investor deposits more money on banks and other fixed income security. Money supply will decrease by this.
Emerging economics is facing demand side inflation, it is inevitable to growth countries. On the other hand, developed countries often face the demand side inflation, because of full employment and full production capacity.
Higher inflation might be caused high interest rate, consumer and corporates have to spend more money for interest amount. Corporates postpone their investment decision due to higher investment cost and inadequate money supply.
Higher inflation will increase the company's raw materials and wages.
High inflation is making weakness the currency exchange rate and will make the high volatility of currency market.
Higher investment cost, low consumer demand and exchange rate fluctuations are also create the uncertainty of country economic.
Stock market return
When inflation is stable economic decision can be made more easily. The uncertainty of future is significantly reduced. Hence the lon run corporate earnings have more than kept pace with inflation because business have made up in periods of moderately falling and stable prices.
In short run inflation increases interest rates and also result s in business and consumer uncertainty which cause declining earnings. Expectations regarding both factors adversely affect stock prices. In the long run inflation and interest rates approach a middle norm making common stocks attractive relative to alternative investment mediums. In addition, businesses are able to adjust their production and pricing schedules to provide a positive net real interest rate of return. Both conditions are bullish for the market.
During periods of unstable and especially accelerating inflation, common stocks therefore make poor investments and should be sold. However, in the long run common stocks are an excellent hedge against inflation.
The intrinsic value of common stocks is determined by investors current expectations of just two factors.
Future interest rate and future dividends. Both factors are intimately tied to inflation.
Inflation is primary caused by an increase in the money supply that outpaces economic growth.
High inflation can be good, as it can stimulate some job growth, but high inflation can also impact corporate through higher input costs.
Types of inflation
Demand pull inflation:
It occurs when demand for goods is caused by increase in money supply in the economy or disposable income of individuals and they tend to spend more. The production increases to meet the demand . this elevate the performance of the companies. hence the value of stock price increase.
Cost pull inflation:
It occurs due to increase it cost of input materials and wages and not because of increase in market demand. The supply gradually reduces due to high cost, while demand would not increase as an expected level, there top line and margin will stagnant.
Effect of inflation
If, inflation Will go higher pace, central bank have to taken some monetary action to control the the money supply. Central bank has many tool such as CRR and SLR may increase some basis point. Interest rate increase control the money supply and will raise nominal interest rate. The nominal interest rate means, interest rates minuses by inflation. When nominal interest rate in higher pace, more investor deposits more money on banks and other fixed income security. Money supply will decrease by this.
Emerging economics is facing demand side inflation, it is inevitable to growth countries. On the other hand, developed countries often face the demand side inflation, because of full employment and full production capacity.
Higher inflation might be caused high interest rate, consumer and corporates have to spend more money for interest amount. Corporates postpone their investment decision due to higher investment cost and inadequate money supply.
Higher inflation will increase the company's raw materials and wages.
High inflation is making weakness the currency exchange rate and will make the high volatility of currency market.
Higher investment cost, low consumer demand and exchange rate fluctuations are also create the uncertainty of country economic.
Stock market return
When inflation is stable economic decision can be made more easily. The uncertainty of future is significantly reduced. Hence the lon run corporate earnings have more than kept pace with inflation because business have made up in periods of moderately falling and stable prices.
In short run inflation increases interest rates and also result s in business and consumer uncertainty which cause declining earnings. Expectations regarding both factors adversely affect stock prices. In the long run inflation and interest rates approach a middle norm making common stocks attractive relative to alternative investment mediums. In addition, businesses are able to adjust their production and pricing schedules to provide a positive net real interest rate of return. Both conditions are bullish for the market.
During periods of unstable and especially accelerating inflation, common stocks therefore make poor investments and should be sold. However, in the long run common stocks are an excellent hedge against inflation.
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