Inflation and stock prices

mark_cycling00

Hi, was just discussing this with neighbour; seems a logic assumption but I bet it's more complicated ....

Over the last 2 years of inflation prices have risen by about 20%. Is it reasonable to assume that over an period of time that this 20% would be reflected in stock valuations.

I know there are lots of factors involved and right now dividend stocks may be lower etc. But over the long term is there a 20% increase that has to happen or does inflation destroy value and future prospects?

Any thoughts? Thanks 

Hoenir

mark_cycling00 said:

Over the last 2 years of inflation prices have risen by about 20%. Is it reasonable to assume that over an period of time that this 20% would be reflected in stock valuations.

Stock valuations are ultimately dependent on financial performance. Interest rate increases have barely begun to hit the real economy yet. Nor is inflation uniform in it's impact. Different industries different countries will experience different outcomes. 

masonic

Inflation will affect the breakeven price of the goods and services sold by the business, as will an increased cost of borrowing if the company has debt. If they wish to maintain their profit margin, they would need to adjust the sale price of the goods and services accordingly. However, this may impact their volume of sales. If their customers are willing to accept an increase in the price they pay, then fundamentally the real earnings of the company will not be impacted, so all other things being equal, its value will rise with inflation. However, in reality, customers are likely to change their behaviour in response to prices rising, either by reducing consumption or switching product if there is a competitor who can offer a better deal.

InvesterJones

mark_cycling00 said:

Hi, was just discussing this with neighbour; seems a logic assumption but I bet it's more complicated ....

Over the last 2 years of inflation prices have risen by about 20%. Is it reasonable to assume that over an period of time that this 20% would be reflected in stock valuations.

I know there are lots of factors involved and right now dividend stocks may be lower etc. But over the long term is there a 20% increase that has to happen or does inflation destroy value and future prospects?

Any thoughts? Thanks 

Inflation is the price of goods and services, not the price of stocks. The only immediate correlation would be if inflation caused say the pound to decrease in strength compared to the dollar by 20%, then stocks listed in dollars would see a price to us that was 20% higher so it'd look like the stock increased by 20%. But that hasn't happened as the US has also seen inflation.

jimjames

mark_cycling00 said:

Over the last 2 years of inflation prices have risen by about 20%. Is it reasonable to assume that over an period of time that this 20% would be reflected in stock valuations.

Inflation at 20% might be a result of companies increasing their prices by 20% already. However if that's to cover the increase in raw material, energy or labour costs then their margin might actually be static.

mark_cycling00

Thanks all.

It's a shame because effectively it seems that pensions won't have gone up enough to cover the effects of inflation.

Apparently Unilever passed on all the cost increases to their customers but the share price has dropped. So guess their margin is now slightly less 

400ixl

mark_cycling00 said:

Apparently Unilever passed on all the cost increases to their customers but the share price has dropped. So guess their margin is now slightly less 

Unilever maintained a level of revenue & profit by increasing prices or reducing materials (size) but their volumes were down. They also sold off several brands last year to bring in money.

Higher inflation drives customers to own brands which are cheaper.

There is yet to be signs that Unilever will turn this trend around so the share price would be expected to be lower.

Share prices tend to rise at times of growth for the business. Times of high interest are typically low growth.

masonic

mark_cycling00 said:
It's a shame because effectively it seems that pensions won't have gone up enough to cover the effects of inflation.

That's very much dependent on what your pension is invested in and for how long it has been invested. Over the last 2 years the FTSE All-world index has gained just shy of 20% on a total returns basis, which will be above CPI. Prior to that it enjoyed many years of well above inflation returns.

JohnWinder

Two pieces of research: https://www.evidenceinvestor.com/higher-inflation-and-stocks/. And https://www.firstlinks.com.au/inflation-impacts-different-types-investments

InvesterJones

mark_cycling00 said:

Thanks all.

It's a shame because effectively it seems that pensions won't have gone up enough to cover the effects of inflation.

It's not for no reason that central banks want to keep inflation to a target. As mentioned, historically stocks do return higher than inflation, but you have to allow for years where they don't. If you need the money before they return positive in real terms then it might be worth considering other asset types.

Killmark

From what I've seen, that 20% inflation doesn't always translate to a straight-up 20% increase in stock values. A lot depends on how companies handle rising costs and what the overall economic vibe is like. Some businesses manage to pass on the costs and do well, but others, not so much.

I started following a stock market live schedule to get a better feel for how things like inflation impact the market day-to-day. Really puts into perspective how dynamic the market is and how many different factors play into stock prices.