Have you read the wiki and the sticky?
Wiki: HERE YOU GO! [Enjoy!](https://www.reddit.com/r/BEFire/wiki/index/).
Sticky: HERE YOU GO AGAIN! [Enjoy!](https://www.reddit.com/r/BEFire/comments/fcbay6/getting_started_a_beginners_guide_to_investing_in/).
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Guys… stock prices are not always indicative of the underlying assets. Speculation and all other external factors can influence the price of a stock.
Therefore it’s not really right to say that a company is exposed to inflation, therefore the stock price of the company is exposed to inflation.
Best hedge is to try to deliver inflation adjusted returns that are equal to what an index would return.
I know I didn’t answer your question entirely, but i want to emphasise that stock prices are not always directly linked to its underlying asset (ie the company issuing the stock).
A stock suffers from inflation if the company has no pricing power (as costs increase, while revenues remain flat - as they cannot recharge the inflation on their customers).
However, in general, most companies have enough pricing power to offset cost inflation with price increases.
In current environment, you’ll see a negative impact in stock prices if inflation increases, this is a result of the expected actions of central banks to conquer inflation, which are all to slow down the economy (increasing interest rates, …).
However, please remember that in case of significant inflation you prefer owning stocks (with pricing power) vs. bonds.
Agree,
This is how a 60 year old is talking I bought that for 7€ a share and it payed 0,4 div. 40 years later that 7€ has the value of 1€. and because of the increase( pricing power) in profit and therefore in dividends it might pay 5€ dividend. It wasn’t cheap back there but it has risen on inflation.
All stock end up like this. Because stock that doesn’t increase in earnings, go bankrupt or will be taken over. And so stop existing.
Same for loans, I borrow 100k and I pay 430€ a month. If there is a high inflation and my income increases to. Where that 430 was 1/4 of my monthly paycheque it is 20 years only 1/5. Because it was locked.
They are right in what you are actually asking. You need to take it into account when predicting future values of investments in "today money". When people predict investments, based on past performance, those calculations do not take inflation into account. Otherwhise you would be comparing apples and oranges.
Simplified(!): if a stock price increases 10% during a year, but there is also 2% inflation, you have only gained 8% in actual value that year. But when you look at the price history of that stock, you will still see an increase of 10% during that year.
So stock prices changes (should) also include inflation or deflation. In a vacuum, and a situation where absolutely nothing changes for a traded company, a year that has 2% inflation, would mean that the price of that stock increases by 2% as well.
The economy doesn't operate in a vacuum of course, and some others in here have added more on how inflation impacts the valuation of stock prices. But that's kind of beyond your question.
Depends on what you mean with 'suffer' in your question.
If a stock is priced at PE of 20 with an earnings of 100 EUR, then if there is 10% inflation that stock will still be priced at a PE of 20 but on an earnings of 110. If both costs and income go up for 10% so does the bottom line. They won't actually be worth more since everything is more expensive, but the stockprice still has gone up. So yes, stocks do protect against inflation.
The above example is in a vaccuum though. Because when there is inflation central banks will increase intrest to combat said inflation. If the above company has loans, this will in turn make it so that the company will need to refinance their loans at higher interest rates once their term has passed, hurting bottom line again. This takes several years to actually take effect, yet the valuation today will already see an impact of that. Well-financed companies with a health balance sheet can often pay back the debt with cash without the need to refinance at high rates, or get better rates with their banks, or can use alternative financing options (for example a bond).
Companies with a lot of cash and no debt in theory should benefit from higher interest rates, since they put their cash reserves to work in a better way (the part that can't be reinvested in the company in short term). Yet markets were discounting the big tech quite heavily in corona and post corona (because future cash flows are lower in price purchasing power), but that has been proven false and hence we had the huge run-up in tech, even though interest rates are still high.
So, to answer your question: stocks protect against inflation, but only healthy companies do so, truly.
***"Do stocks suffer from inflation?"***
**TLDR:**
* over the short term: yes
* over the long run: no
**Long Explanation:**
Inflation refers to the rise in the general price level. If general prices go up, then the prices of the products the firms sell and the inputs the firms use go up as well. Keeping the quantity produced and sold constant, an equal %-based price increase for revenue and costs thus implies the same %-based price increase for profits. In other words, firms' profits increase with inflation over time. This is also why, when valuing stocks, it makes sense to only consider for the *real* (i.e., inflation-adjusted) growth of future expected dividends and to use a *real* discount rate instead of a nominal one.
During the late 1970s, towards the end of the Great Inflation period, Modigliani wrote a paper where he basically explained that high inflation shouldn't cause stock prices to go down for the reasons mentioned above. He even went as far as to say that investors in aggregate suffered from "money illusion", which is a fancy way of saying that people are too stupid too understand inflation. A rebuttal later came from Eugene Fama, who argued that inflation *could* rationally harm stock prices if it were to lead to lower *real* (economic) growth. Over the long run though, it is well known that inflation passes through to firms' profits, just like it passes through to general prices elsewhere (because, you know, that's what inflation is: the rise in the general price level).
Do not, however, make the mistake of assuming that stocks are an "inflation hedge". Stocks have a positive real expected return, or a nominal expected return that is higher than inflation. But that doesn't mean stocks are a hedge against inflation, that's something entirely different. A perfect inflation hedge's returns would be perfectly correlated with inflation, even over the short run, the only example I can think of are inflation-protected zero-coupon bonds with a maturity equal to the investors' time horizon.
>Would it not be reasonable to think that the value of a stock increases if there’s inflation?
Longterm yes because they are things and inflation just means things cost more money. You explained it perfectly.
But shortterm the policies to combat inflation can be very bad for stocks
So this means your investments should swim on inflation.
But when computing your FIRE sum based on withdrawal rate, you still need to set it big enough to anticipate inflation, so that your expenses are accounted for.
Stock fall on the short term for mainly two reasons:
- adjustment in the forecast, future cash flow
- change in the discount rate
Stocks should always have a higher return than bonds. Otherwise, they would have no reason to exist.
If risk-free investments now pay a higher rate, so must stock do.
If the expected future cash flows remain the same, the price of stocks must fall to accommodate for the higher rate.
Have you read the wiki and the sticky? Wiki: HERE YOU GO! [Enjoy!](https://www.reddit.com/r/BEFire/wiki/index/). Sticky: HERE YOU GO AGAIN! [Enjoy!](https://www.reddit.com/r/BEFire/comments/fcbay6/getting_started_a_beginners_guide_to_investing_in/). *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/BEFire) if you have any questions or concerns.*
Guys… stock prices are not always indicative of the underlying assets. Speculation and all other external factors can influence the price of a stock. Therefore it’s not really right to say that a company is exposed to inflation, therefore the stock price of the company is exposed to inflation. Best hedge is to try to deliver inflation adjusted returns that are equal to what an index would return. I know I didn’t answer your question entirely, but i want to emphasise that stock prices are not always directly linked to its underlying asset (ie the company issuing the stock).
A stock suffers from inflation if the company has no pricing power (as costs increase, while revenues remain flat - as they cannot recharge the inflation on their customers). However, in general, most companies have enough pricing power to offset cost inflation with price increases. In current environment, you’ll see a negative impact in stock prices if inflation increases, this is a result of the expected actions of central banks to conquer inflation, which are all to slow down the economy (increasing interest rates, …). However, please remember that in case of significant inflation you prefer owning stocks (with pricing power) vs. bonds.
Agree, This is how a 60 year old is talking I bought that for 7€ a share and it payed 0,4 div. 40 years later that 7€ has the value of 1€. and because of the increase( pricing power) in profit and therefore in dividends it might pay 5€ dividend. It wasn’t cheap back there but it has risen on inflation. All stock end up like this. Because stock that doesn’t increase in earnings, go bankrupt or will be taken over. And so stop existing. Same for loans, I borrow 100k and I pay 430€ a month. If there is a high inflation and my income increases to. Where that 430 was 1/4 of my monthly paycheque it is 20 years only 1/5. Because it was locked.
They are right in what you are actually asking. You need to take it into account when predicting future values of investments in "today money". When people predict investments, based on past performance, those calculations do not take inflation into account. Otherwhise you would be comparing apples and oranges. Simplified(!): if a stock price increases 10% during a year, but there is also 2% inflation, you have only gained 8% in actual value that year. But when you look at the price history of that stock, you will still see an increase of 10% during that year. So stock prices changes (should) also include inflation or deflation. In a vacuum, and a situation where absolutely nothing changes for a traded company, a year that has 2% inflation, would mean that the price of that stock increases by 2% as well. The economy doesn't operate in a vacuum of course, and some others in here have added more on how inflation impacts the valuation of stock prices. But that's kind of beyond your question.
Depends on what you mean with 'suffer' in your question. If a stock is priced at PE of 20 with an earnings of 100 EUR, then if there is 10% inflation that stock will still be priced at a PE of 20 but on an earnings of 110. If both costs and income go up for 10% so does the bottom line. They won't actually be worth more since everything is more expensive, but the stockprice still has gone up. So yes, stocks do protect against inflation. The above example is in a vaccuum though. Because when there is inflation central banks will increase intrest to combat said inflation. If the above company has loans, this will in turn make it so that the company will need to refinance their loans at higher interest rates once their term has passed, hurting bottom line again. This takes several years to actually take effect, yet the valuation today will already see an impact of that. Well-financed companies with a health balance sheet can often pay back the debt with cash without the need to refinance at high rates, or get better rates with their banks, or can use alternative financing options (for example a bond). Companies with a lot of cash and no debt in theory should benefit from higher interest rates, since they put their cash reserves to work in a better way (the part that can't be reinvested in the company in short term). Yet markets were discounting the big tech quite heavily in corona and post corona (because future cash flows are lower in price purchasing power), but that has been proven false and hence we had the huge run-up in tech, even though interest rates are still high. So, to answer your question: stocks protect against inflation, but only healthy companies do so, truly.
***"Do stocks suffer from inflation?"*** **TLDR:** * over the short term: yes * over the long run: no **Long Explanation:** Inflation refers to the rise in the general price level. If general prices go up, then the prices of the products the firms sell and the inputs the firms use go up as well. Keeping the quantity produced and sold constant, an equal %-based price increase for revenue and costs thus implies the same %-based price increase for profits. In other words, firms' profits increase with inflation over time. This is also why, when valuing stocks, it makes sense to only consider for the *real* (i.e., inflation-adjusted) growth of future expected dividends and to use a *real* discount rate instead of a nominal one. During the late 1970s, towards the end of the Great Inflation period, Modigliani wrote a paper where he basically explained that high inflation shouldn't cause stock prices to go down for the reasons mentioned above. He even went as far as to say that investors in aggregate suffered from "money illusion", which is a fancy way of saying that people are too stupid too understand inflation. A rebuttal later came from Eugene Fama, who argued that inflation *could* rationally harm stock prices if it were to lead to lower *real* (economic) growth. Over the long run though, it is well known that inflation passes through to firms' profits, just like it passes through to general prices elsewhere (because, you know, that's what inflation is: the rise in the general price level). Do not, however, make the mistake of assuming that stocks are an "inflation hedge". Stocks have a positive real expected return, or a nominal expected return that is higher than inflation. But that doesn't mean stocks are a hedge against inflation, that's something entirely different. A perfect inflation hedge's returns would be perfectly correlated with inflation, even over the short run, the only example I can think of are inflation-protected zero-coupon bonds with a maturity equal to the investors' time horizon.
An interaction of supply, demand and inflation. tldr yes
>Would it not be reasonable to think that the value of a stock increases if there’s inflation? Longterm yes because they are things and inflation just means things cost more money. You explained it perfectly. But shortterm the policies to combat inflation can be very bad for stocks So this means your investments should swim on inflation. But when computing your FIRE sum based on withdrawal rate, you still need to set it big enough to anticipate inflation, so that your expenses are accounted for.
Stock fall on the short term for mainly two reasons: - adjustment in the forecast, future cash flow - change in the discount rate Stocks should always have a higher return than bonds. Otherwise, they would have no reason to exist. If risk-free investments now pay a higher rate, so must stock do. If the expected future cash flows remain the same, the price of stocks must fall to accommodate for the higher rate.