inflation and stocks

can someone please explain to me why when there is a rise in inflation it has a negative effect on the stock market?

 

Very simple: investments like properties, stocks, bonds,... are all competing for funding. As inflation is one of the mandates by most central banks to keep in check it will usually be targeted by higher central bank reserve and refinancing rates. That is one of the tools how central banks target an overheating of the price of money (aka inflation). With higher interest rates that are set by central banks a trickle down effect subsequently also pulls up prime rates and all other interest rates in the market. That makes interest bearing assets more attractive and hence funding is reallocate away from stocks to interest bearing assets.

Another reason is the signaling effect. Inflation and subsequent action by Central banks of raising interest rates signals that many assets such as stocks are probably enjoying too high valuations. That in turn causes large stock investors to reduce their equity allocations.

 

the inflation trade is to load up on oil and materials. and for the more aggressive to short tech at the same time. anyone actually doing this?

 

Why short tech UW - what is the theory there? I'm slowly buying into gold/metal ETFs, and will probably try and buy a second house to pay off the mortgage with greatly inflated dollars.

Thanks.

 

Inflation is so highly complex and there are many factors that go into what is the best inflation hedge.

In the research that I’ve done, stocks, oil/energy, REITs, TIPs, Gold and even t-bills have all been very good inflation hedges at different points in time. And conversely, all those things performed poorly relative to others during certain periods of inflation.

 

When exactly to load ?

When rates go up or when oil goes under the $0.00 ?

 

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That partly explains why QQQ+ most tech has done so well since 2009+ shorts did so well on TLT this year. Sort of explains it anyway. NOT a prediction + not bank insured...................

 

Does it? Ceteris paribus , inflation should increase the price of equities, No?

 

No

 

Take a look at dollar futures over time versus the S&P over time. Does there seem to be any connection?

Or said, as we might when trying to explain to a fifth grader: "If the purchasing power of your dollar goes down between today and tomorrow (price inflation) would you expect the price of a share of ownership in a company in which there have been no significant changes between today and tomorrow, to go up, or to go down, tomorrow?"