Stocks in an inflationary environment?
Hey gang —
I know the advice from CM is to liquidate stocks in a deflationary economy (cuz they’ll go down down down), but are stocks a good idea in an inflationary/hyperinflationary environment? The binary-world answer would seem to be "yes" since if stocks+deflation = bad then surely stocks+[hyper]inflation = good, but if I’ve learned anything in 43 years on this l’il orb, it’s that a dualistic worldview is bunk. [smile]
Thanks in advance, Sager
Stocks in a normal inflationary environment, i.e. the 1-3% per year inflation we’ve had since the depression, are a good investment. Stock price is simply a measure of the desirability to own the future cashflows of a company discounted based on a risk premium. In steady, low inflation, risk premium is very low (makes price go up), so people are biased toward putting money in equities (makes price go up). That type of steady low inflation is also the stable environment that enables productive commerce, so real productivity does improve…a basis for larger future cashflows…price goes up. And finally the fact that inflation is happening puts an embedded growth into the nominal (vs. real) price of stocks.
Elliott Wave technicians would say the only thing that matters is the 2nd factor I listed…people’s bias for putting money in stocks. Social mood goes up and down. Social mood is now crashing, therefore deflation. During the years since the Depression, mood was generally up with a few little negative blips, therefore it was an inflationary cycle good for stocks.
Hyperinflation on the other hand is horrible for stocks because they are denominated in dollars. Hyperinflation is a collapse of the dollar. So USD-based stocks would be worthless.
Interesting question. Here’s my $.02 – make a distinction between "owning" and "trading" stocks in an inflationary environment. Two completely different mind sets and strategies.
Back in the late spring as this crisis was just getting legs, we closed most of our holdings, rolled into cash and started aggressively trading options – Calls when the market was going up, Puts when the market was going down. As info came out on financial stocks’ broadening exposure to MBS and derivatives – the meltdown started and a ton of money was there for the taking trading puts.
If I had a sizeable stock holding now I would be watching technical indicators on long charts (Weekly or Daily). The second StochRSI and MACD turned down I would buy puts to cover the stock inventory. That way I would preserve my capital since the stock price drop would be offset by the option price gains. Sell the options at or near the bottom of the downward move and wait for the next movement.
Thanks for the info, you two. I feel like a dry sponge in a large bathtub fulla water.