July 11, 2006
Stocks Are One of the Best Inflation Hedges
Surviving Inflation, by David Dreman
During inflationary periods since World War II the same scenario has played out repeatedly. Initially, for six months or so, fear dominates the market, and stocks swoon. Then the market bounces back with a vengeance. A classic example is the 1977–81 period, when the country flirted with hyperinflation. Worriers evoked the Weimar Republic of the 1920s. During the unhappy 1977–81 span the Consumer Price Index rose 12.6% annually. Equities at the outset retreated 7.2% in 1977, but over the next four years stocks returned 12.3% annually, versus 10.8% for the CPI. Even though inflation remained sky-high, stockholders more than kept up with the cost of living.
Cat: | Time: 9:59 am (utc+8)
July 11th, 2006 at 1:24 pm
interesting, cm. i have wondered why if the $ of goods rise during inflation, then the stock that represent those assets (goods) of the company should not rise also.
July 11th, 2006 at 9:17 pm
It’s always seemed to me that inflation should drive stock prices up. Not that it increases share’s value, but if you lower the value of an item’s denomination ($) that item should then increase in its said denomination. The “6 months ahead factor” that the market participants embody says that inflation will choke off consumer spending b/c (believe it or not) payroll increases are usually the last to rise due to inflation. Prices (C+P) tend to increase as result of a lax monetary policy, followed by wage demand and therefore, once wages match prices, spending resumes and and stock prices “jump back” an effect now magnified by lower currency value (increased markt cap aka stock price)