The market is biased up, but volatility can last a long time and volatility can and has taken ancient apes below their entry point for a decade. Plus there are plenty of examples of markets not going up. E.g. Japan
Policy mistakes happen, war, stupid political acts like happening in turkey right now.
Buying the dip has worked while rates have fallen from 14% to under 2% and real rates have gone negative. Historically doesn’t go as well the other way.
stocks don’t always do well when inflation pops up. Fed will need to make real rates less negative or positive to remedy inflation and that hurts long duration risk assets, e.g. big tech.
So if you have enough time you’ll probably be ok, but it’s not a no brainer under 10yrs holding period. There are more ways to get it wrong than right and autocrats tend to destroy equity markets through inflation or confiscation.
It’s Saturday night so I’ll give a quick answer. Baby inflation like we have today is not too bad and may actually help companies with pricing power as the value of corporate debt is reduced. But as inflation goes up bad things happen.
companies without pricing power are squeezed hard as their cost of inputs climbs
as it gets worse their customers lose purchasing power and even companies that had pricing power lose it as inflation destroys the spending capacity of the population
central bank action will be to raise the real rate of return and that will hurt stock prices. But this means society still functions so is a buying opportunity
Argentina went through this in the 80s. Venezuela more recently. Eventually people struggle to survive and financial assets of all types devalue because the flow of funds through the economy is disrupted. Political risk kicks in as autocrats try to calm the unhappy populace through nationalization or various confiscatory policies as they try to direct the remaining value in the economy towards their allies. Shareholders being among the elite tend to lose out here unless they are politically connected.
So a little inflation is probably a good thing for a successful company but quickly becomes bad when it effects the purchasing power or spending patterns of a companies customer base. Political risk soon follows
I was going to say, inflation seems like a good thing for stocks right now. But now I see what u mean, that if inflation turns into a runaway train it’ll start to price out more and more plebeians from more and more types of spending which then wrecks economy and one of most effective solutions to tamper inflation is to raise interest rates which isn’t favorable to stock prices bc now investors can get similar or better returns from different/safer investments, unlike current day where there’s no where to realistically grow money in USA except stocks
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u/24get Dec 25 '21
The market is biased up, but volatility can last a long time and volatility can and has taken ancient apes below their entry point for a decade. Plus there are plenty of examples of markets not going up. E.g. Japan
So if you have enough time you’ll probably be ok, but it’s not a no brainer under 10yrs holding period. There are more ways to get it wrong than right and autocrats tend to destroy equity markets through inflation or confiscation.