𝐓𝐡𝐞 𝐬𝐩𝐞𝐜𝐭𝐞𝐫 𝐨𝐟 𝐢𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧 𝐢𝐬 𝐛𝐚𝐜𝐤, 𝐩𝐫𝐢𝐜𝐞𝐬 𝐚𝐫𝐞 𝐫𝐢𝐬𝐢𝐧𝐠 𝐦𝐨𝐫𝐞 𝐬𝐭𝐫𝐨𝐧𝐠𝐥𝐲 𝐭𝐡𝐚𝐧 𝐭𝐡𝐞 𝐛𝐫𝐨𝐚𝐝 𝐦𝐚𝐫𝐤𝐞𝐭 𝐞𝐱𝐩𝐞𝐜𝐭𝐞𝐝. 𝐇𝐨𝐰 𝐭𝐨 𝐝𝐞𝐚𝐥 𝐰𝐢𝐭𝐡 𝐢𝐭?
There are good arguments for further increases in stock market prices in the coming months: The global economy is recovering strongly, and profits at many companies are rising more strongly than expected. Consumers have saved a lot of money during the pandemic, so consumption is likely to pick up. And governments want to invest heavily in infrastructure. In addition, profits in the $FEZ are expected to rise by around 50% in 2021 and 2022 - Europe has a lot of catching up to do. This is actually a good mix for the economy and the stock market. However, this mood is being dampened somewhat at the moment.
Unfortunately, investor sentiment in this June 2021 is still cautious. It is clear that there is no upswing without the perpetual "Wall of Worry" on which share prices climb. These days, this wall of worry is called "inflation". Consumer prices in particular are viewed with unease: Inflation in the USA shot up by five percent in May, the highest since August 2008. In Europe, too, the numbers on the price tags are getting bigger. In Germany, inflation rose to 2.5 percent in May. This is the strongest monthly increase since September 2011 (www.destatis.de/EN/Themes/Economy/Prices/Consumer-Price-Index/_node.html;jsessionid=3C05B9BF351C0760166B34D586837D97.live742 ).
Under the impression of the current data, the U.S. Federal Reserve is changing its tone: the key interest rate could be raised as early as 2023, one year earlier than previously envisaged. For now, however, it will remain at the historically low range of zero to 0.25 percent. According to Jerome Powell (U.S. Federal Reserve), there is a risk that inflation will be higher than the broad market expects. This will be responded to, probably initially with a reduction in bond purchases, which currently suck $120 billion a month from the market.
𝐖𝐡𝐲 𝐢𝐬 𝐢𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧 𝐚 𝐩𝐫𝐨𝐛𝐥𝐞𝐦 𝐟𝐨𝐫 𝐬𝐭𝐨𝐜𝐤𝐬 𝐚𝐭 𝐚𝐥𝐥 - 𝐚𝐟𝐭𝐞𝐫 𝐚𝐥𝐥, 𝐜𝐨𝐦𝐦𝐨𝐝𝐢𝐭𝐲 𝐩𝐫𝐢𝐜𝐞𝐬 𝐫𝐢𝐬𝐞 𝐚𝐥𝐨𝐧𝐠 𝐰𝐢𝐭𝐡 𝐭𝐡𝐞𝐦? 𝐘𝐞𝐬, 𝐭𝐡𝐞𝐲 𝐝𝐨, 𝐛𝐮𝐭 𝐜𝐨𝐫𝐩𝐨𝐫𝐚𝐭𝐞 𝐯𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧𝐬 𝐚𝐫𝐞 𝐧𝐞𝐠𝐚𝐭𝐢𝐯𝐞𝐥𝐲 𝐢𝐦𝐩𝐚𝐜𝐭𝐞𝐝:
Valuation ratios such as price-to-earnings (P/E) ratios are based on analysts' expected earnings over the next twelve or 24 months. The higher the inflation, the more the value of these future profits is discounted. Future profits therefore lose value when interest rates rise. This would become a problem especially for shares of those companies that are making little or no money in the present. But the overall stock market is also expensive according to classical ratios and therefore relies on a generous interpretation of the valuation ratios.
Moderate inflation is no problem for the stock markets. The decisive factors are the extent and circumstances. Stocks perform particularly well when inflation is below one percent and rising. This combination usually exists when the economy recovers after a recession and the risk of deflation, i.e. falling prices, fades. It only becomes dangerous when inflation rises above three percent and continues to increase. Also important is the pace of the rise: If prices shoot up very quickly, this unsettles the stock markets. A slow upward movement is easier to digest.
𝐇𝐨𝐰 𝐝𝐨 𝐈 𝐚𝐝𝐣𝐮𝐬𝐭 𝐭𝐡𝐞 𝐩𝐨𝐫𝐭𝐟𝐨𝐥𝐢𝐨 𝐭𝐨 𝐭𝐡𝐢𝐬?
Depending on the industry, stock market reactions to rising inflation vary widely. Young companies, for example, in the technology and renewable energy sectors, where investors are counting on significant profit increases in the future, are likely to have a harder time on the stock market. The same applies to those with high debts, because the interest burden will rise there. However, there are always winners on the stock market.
Precious metals and industrial metals and shares of their producers are increasingly bought at good entry prices. Consumer goods are also weighted higher. Finally, to cushion the volatility in the past week, I have included the historically favorable $VXX as a hedge. This position is already up 10.28% in two days.
What do you think about the inflational risk ahead? Let me know by commenting!
I wish you a successful start to the new week!