You’ve likely been hearing that this inflation might be inevitable to an extent, right? When the Federal Reserve engages in expansionary monetary policy by lowering interest rates to the floor and quantitative easing to the tune of $120 billion a month, these are the kinds of policies that can contribute to inflation. And, a little “reflation” was expected anyway.
We now find ourselves at a crossroads where the economy has already recovered from the 2020 slouch on the inflation side of things, but other variables continue to crop up and threaten to keep our inflationary trend going.
So, a natural question arises for many retail investors:
Will inflation impact my investments?
The effects of inflation ripple through the economy
Inflation is an economic phenomenon that rarely ever exists in a vacuum and, even on a local level, can impact products across multiple industries. Although a certain level of inflation is theoretically necessary for the prosperity and growth of a nation’s economy, consumers start to feel its negative effects when it gets out of hand.
Inflation is often viewed from a consumeristic standpoint, referencing the latest CPI data (Consumer Price Index) or the cost of gas. The reality is that businesses are actually one of the first to take a hit and are sometimes impacted by its effects for the longest–especially, when part of the issue stems from supply chains.
Effects of inflation: It hurts earnings
Eventually, this ends up making its way to a company’s bottom line. Public companies report earnings every 3 months to the SEC via what’s known as a 10-Q form, and this is usually what’s referenced by investors and analysts when they debate earnings reports.
Inflation, however, usually puts a ding in earnings and this is not something the markets take kindly to. This was exemplified nicely in 2009 when inflation jumped, earnings dropped, stock prices remained high, and the S&P 500’s P/E ratio rose to its highest mark ever.
It’s worth noting that markets eventually recover in most cases, because investing is a game predicated on the future of a business, not just the present, and investors proved this in 2009 as the S&P 500 did eventually climb to previous highs after that drop.
That being said, today, bad earnings reports and fears of runaway inflation can stoke the fire of anxiety and can lead to dips of varying degrees depending on the stock. Some of the biggest burns seem to come to–you guessed it–growth stocks.