What impact will inflation have on the stock market (will stocks go up? down?)?

Answer 1

Great question, that has a lot of subtlety. I would say it has two answers, based on horizon.

Short term - negative for equities.
When the central bank of a country is considered to have credibility (such as the US Fed), unexpected signs inflation outside the range targeted by the central bank will typically cause the market to go down, all things equal. This is because the central bank will be expected to tighten monetary policy, often by raising rates, but also potentially through other means, like increasing the reserve ratio for banks. This tightening of policy will typically cause economic activity to slow, leading to lower corporate profits. Expectations of this hit in earnings means the stock market is likely to go down. Also, the cost of short term borrowing goes up for a company as well, which also would hurt it. But again, the central bank has to be considered credible (i.e. willing and able to fight against inflation).

In China, the central bank is having much less success in fighting inflation, but the stock market is doing well (though partly due to excess speculation). See http://www.bloomberg.com/apps/news?pid=20601087&sid=aZxcJPA6yz.c&refer=home . On the other hand, signs of inflation in Japan would probably be welcomed by the equity market there, because they have been in a deflationary spiral so long. This is why I said signs of inflation outside of what the central bank is targeting would have a bad effect.

Incidentally, it should be noted that fixed income instruments will also be hit if there are signs of too much inflation as higher rates mean existing instruments with lower rates become less attractive.

Long term - potentially positive for equities:
In the longer horizon, inflation is thought to be beneficial for equities, because earnings are nominal quantities, and a company's value is derived from its future earnings. In other words, higher prices mean a company will earn more, so will have higher future earnings. This is why people often say that stocks are a good "hedge" against inflation. From what I have read, the empirical evidence is at best mixed, probably because higher inflation doesn't happen in a vacuum - it often leads to higher interest rates / financing costs for companies and a cooling of economic growth as the central bank steps in, which will hit earnings.

So in conclusion, in the face of inflationary pressure, in the short run the market probably goes down, and in the longer term it perhaps should go up based on theory, but is likely flat in reality, all things equal.

Hope this helps!

Answer 2

Over the long-run stocks are an inflation hedge...one of the few places that has outperformed inflation. In the short-term, on inflation fears, the stock market will go down mainly because shareholders will be concerned that consumer spending will slow thereby reducing corporate earnings.

Answer 3

When inflation rears its head, the Federal Open Market Committee (the Fed) raises short-term interest rates and this bias diverts money from stocks to fixed income instruments such as bonds and money market securities. So overall, stocks are stressed because of the selling pressure to invest in fixed income securities.

On a personal level, some people switch from dividend paying stocks to fixed income securities because fixed income yields go higher and are perceived to be more secure. On the other hand, as stock prices decrease, stock dividend yields will increase.
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Answer 4

stock investing , should increase with inflation , stocks go up when there are more buyers than sellers in the market, if history is a good indicator stocks should go up , these links may offer some info about stock investing http://charting-the-market.com/ and http://stock-investing-info.com/ and http://otc-market.com/ and http://wallstreetradionetwork.com/