Inflation: How Does it Affect Investment Stocks?

Inflation rates have been rising in big economies such as Brazil, Russia, the US and the UK throughout 2021. This will have a knock-on effect on the stockmarket, but some investment stocks may perform better than others.

Our in-depth article about investing during high inflation periods: https://bit.ly/3zYZye7

Some economists fear a return to high inflation, the likes of which has not been seen for more than 40 years. And since the start of 2021, it has been rising steadily across the world.

If inflation continues to rise, what effect will it have on the stockmarket and your wealth?

When covid-19 sparked a global lockdown, markets plummeted. The pandemic disrupted global supply chains: production lines came to a standstill, shipping stalled and air freight were grounded.

But within five weeks something extraordinary happened. The S&P 500 had plummeted in March 2020 but it soon rallied and its value doubled over the next 18 months.

Governments took unprecedented steps to recharge their economies. In the US alone, the government has allocated more than $4 trillion dollars on stimulus funding. And, in a world of low interest rates, consumers look elsewhere for better returns on their investments.

Duke university in North Carolina recently published a paper looking
at historical returns of the stock market over the past 95 years. It focused on different US equity sectors when inflation moved above 5% — in late 2021, the rate in the US moved above 5.3%.

Of course, historical trends are never a guarantee of future performance, but the researchers found that across all sectors, energy stocks delivered the best positive annual returns.

Another interesting sector were Soft commodities, such as corn, wheat, fruit or livestock have also historically held—or increased—their stock prices during times of increased inflation. This is holding true today.

Then there are the less flashy, age-old stocks which typically offer steady but not spectacular growth rates.

These are known as value stocks.

We took a look at the top three growth stocks and the top three value stocks, based on index weight — according to the S&P Growth and Value Index.

We studied the relationship between stock price and inflation since 2007 when the rate of inflation moved above 2%. The price of these growth stocks tends to decrease more quickly than the price of the value stocks as the rate of inflation increases.

00:00 Inflation is rising across the world
01:30 How Covid-19 affected stock markets
02:17 How stock markets bounced back in 2020
04:06 A world of low interest rates
05:40 Psychology and inflation
06:35 When hyperinflation strikes
07:08 How different stocks react to higher inflation
09:40 How bank stocks react to higher inflation
10:30 How value and growth stocks react to higher inflation


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