A quick analysis of inflation’s correlation with stock prices.
Inflation and Stocks
By David Merkel (The Aleph Blog).
Excerpt: "I read this article today, and it made me want to write on the topic. This is a concept that I learned early in my investment career. It is worth understanding, so that you can do better in investing. Inflation is negative for stocks, but it is a small negative — for every 1% that the inflation rate goes up, stocks decline 2% on average.
That’s not very big. So why do stock investors panic over inflation? They panic because the Fed might respond to inflation, and raise real (inflation-adjusted) interest rates enough to quell inflation. Rises in real interest rates are far more negative to the market — a 1% rise in real rates hurts the equity market by 10%. Why such a big impact?
The impact is large, because when real interest rates are high, capital is scarce. Go back to my “Fed Model” article which is very different from other ‘Fed Models.’ …"
Read more here.
