Inflation: How Does it Affect Investment Stocks? - YouTube

the late 1970s an era defined by bell bottoms  some big characters dubious fashion disco and  

high inflation we cannot accept high rates of  inflation as a permanent fact of american life  

flares may now be a relic of the 20th century but  some economists fear a return to high inflation  

the likes of which have not been seen for more  than 40 years inflation is on the rise inflation  

inflation is a real concern and since the start of  2021 it has been rising steadily across the world  

inflation could be a lot less temporary than some  of the central banks seem to think it is we're  

experiencing a number of novel developments  that we have rarely observed in the past  

the cause now to growing concerns about the deadly  coronavirus the pandemic has created a set of  

highly unusual economic conditions high inflation  is detrimental to a healthy economy if it lasts  

longer it will affect the stock market it will  affect consumers it will affect the economy a lot  

if inflation continues to rise what effect will  it have on the stock market and your wealth

when covert 19 started global lockdown  markets plummeted you must stay at home

do not travel abroad you could describe it as  panic with investors dumping all sorts of risk  

assets including stocks goodness look at those  numbers there an economic shock of unknowable  

scale is upon us fears of covey 19 grid the  nation we were seeing fairly vicious falls  

almost every day the pandemic disrupted global  supply chains production lines came to a  

standstill shipping stalled and air freight were  grounded i think plenty of people thought that  

this could well be the start of a bear market but  within five weeks something extraordinary happened

the s p 500 which tracks the 500 largest  companies in america had plummeted in march  

2020 but it soon rallied and its value doubled  over the next 18 months it felt like it almost  

shrugged off the effects of the corona virus or  factored it in very quickly and it was back to  

business as usual lockdowns meant that people  were spending less than before the pandemic

at the same time governments were taking  unprecedented steps to recharge their economies  

the single biggest economic  relief the largest emergency

of stimulus for the agencies time in our history  

the government is going to  help to pay people's wages

in the us alone the government has allocated more  than four trillion dollars on stimulus funding  

congress adopted an approach that was aimed  at supporting incomes of u.s families across  

the u.s and the idea was that in the  presence of massive job losses the key  

intent was to support income all of this fiscal  stimulus really supercharged consumer spending

we saw central banks lower interest  rates so the cost of borrowing  

is low and qe quantitative easing you know  effectively pumping money into the economy  

a lot of which finds its way into markets to try  and prop up and avoid any sort of massive crash  

john q has a private little nest egg his  practical nature tells him it ought to do  

more than collect moths in a world of low interest  rates consumers look elsewhere for better returns  

in their investments what are you going to  do with your cash you don't want to leave it  

in the bank if you sold off in the worry of a  bear market you're getting not very much return  

leaving it in a savings account so it's going  to find its way into the stock market but the  

pandemic limited the supply of goods and since  economies have reopened supply has been playing  

catch-up with that new-found surge in demand  that has led to a rapid increase in inflation  

we saw the categories like motor vehicles like  cars see a rapid acceleration in prices and  

in inflation it means your dollar or pound or yen  won't buy as much tomorrow as it did today these  

lines chart the price of the two most popular oil  stocks west texas intermediate and brent crude  

after falling to historic lows in april 2020 the  prices of both types of oil have recovered sharply  

we have not seen supply of oil come back to  its precovet level we've seen restraint on  

the front of opec and we've seen restraint on  the u.s front in terms of oil production crude  

oil prices and natural gas prices have really  surged the heads of a number of central banks  

have used cautious language this year saying that  inflation is a transient thing or that we think  

it's going to be temporary their right to calm  fears psychology plays a role in all of this too  

i don't know why i'm telling you this  i'm a dentist you're the psychoanalyst

if consumers fear long-term  higher rates of inflation  

it can quickly become a self-fulfilling  prophecy was that fair doctor  

tell me honestly what you think as they  quickly spend to avoid higher prices in  

the future in that environment we are in what  is called the price spiral and essentially  

this risks having runaway inflation we're  not in that inflationary psychology right now

traditionally central banks  have controlled inflation by  

raising interest rates which  makes borrowing more expensive  

their real fear is hyperinflation examples  of which are strewn through history

in these cases currencies became worthless  

no one is suggesting that any major  economies are heading for hyperinflation  

but any period of higher inflation does  have a knock-on effect on the stock market

historically inflation can spell  bad news for company stocks  

take a look at the dow jones index it measures  30 of the best performing companies in the us  

the red line charts its performance over the last  14 years between 2007 and 2011 when the us rate  

of inflation thus the blue line moved above three  percent the index reacted negatively first in 2008  

when inflation spiked during the subprime  mortgage crisis the dow lost almost half  

its value and again in 2011 when an inflation  increase was soon followed by a weaker index value  

when it comes to periods of higher inflation  markets and investing can get a lot trickier  

some stocks traditionally outperform  in times of higher inflation  

duke university in north carolina recently  published a paper looking at historical  

returns over the past 95 years of different  u.s equity sectors when inflation moved above 5  

researchers focused on eight sustained  periods of inflation from 1926 to 2020

when normal demand and supply patterns were  jolted by global conflict we are determined to  

preserve our freedom no matter what the cost oil  embargoes oil reserves are running out revolution  

and economic booms the legislative process to put  america back on the road economic health is now  

fully underway 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

companies that produce gas that produce oil that  produce renewable energy they will all be thriving  

during inflationary times but it is because  inflation is caused by increase in energy prices  

soft commodities such as corn wheat fruit  or livestock have also historically held  

or increased their stock prices and this is  holding true today since january 2021 the three  

best performing soft commodities have soared in  price the researchers at juke university found  

that commodities offered on average a 14 return  on investments during periods of high inflation

historically the fate of bank stocks  during periods of high inflation  

has been hard to gauge how much are you  going to start off with five shillings good  

when inflation hits there is an expectation of an  interest rate hike from central banks so in theory  

banks should benefit from that because an interest  rate hike makes it more profitable for banks to  

lend money well i think we can make you this long  will the bank need security no i don't think so  

inflationary pressure however can also signal that  an economy is in difficulty ideal conditions for  

debt defaults to arise this seems okay banks are  very very embedded in that economic cycle dynamics  

so they actually might get hit by the sort of  recession that may follow an inflation spike  

then there are the less flashy age-old  stocks which typically offer steady  

but not spectacular growth rates these are  known as value stocks as investors become  

a bit more concerned about the economy and the  effect that higher inflation could have on it  

they could turn away from perhaps some of the more  aggressive go-getter tech type stocks for example  

and look to a more traditional blue  chip dividend yield slightly safer play

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 two percent the price of these growth  

stocks tends to decrease more quickly than the  price of the value stocks as the rate of inflation  

increases technology stocks could suffer if we had  higher inflation some of them anyway clearly some  

of the big names if we take the likes of facebook  amazon netflix google they weren't around in the  

1970s when we had runaway inflation so it's  difficult to know how they will be impacted

instead of focusing on potential  growth in times of inflation  

investors tend to look at how much leverage or  debt a specific company or stock has taken on  

value stocks are typically  better placed in this respect

it's unlikely that rich economies are headed  back to the kind of double-digit inflation  

last seen in the late 70s i want to  have a frank talk with you tonight about  

our most serious domestic problem inflation  

we are going to see some cooling of inflation but  inflation is likely to remain persistently higher  

than it was in the decade before the coveted  crisis if we do see interest rates gradually get  

ratcheted up that could be perhaps something of  a bigger shock than stock markets were expecting

and could be a reason for people to perhaps head  for the exits gradually on stock markets a more  

likely scenario is a period of what's known  as stagflation where inflation rises at the  

same time as the economy slows either way there  will be opportunities for traders and investors  

78.77% of retail investor accounts lose money when trading with this provider. You should consider whether you can afford to take the high risk of losing your money.

to capitalize on the changing economic climate i'm  david jones chief market strategist at capital.com  

we've written a piece on how commodities  value and growth stocks perform during  

periods of higher inflation it's available on our  platform click on the link and don't forget to  

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