Last week, stock prices were volatile. Chalk those results up to last week’s announcement on inflation. The Consumer Price Index (CPI) for April clocked in at 4.2%. That’s the fastest year-over-year uptick for inflation in decades. It is also about a 50% increase from the expectations outlined by the Fed. The Producer Price Index (PPI) was even higher. Naturally, this has triggered concerns about inflation. I want you to know that now is the time to remain calm.
What is the Threat of a Rate Hike During Inflation?
Before we tackle the question above, let’s first discuss why inflation matters to the market. When inflation rates are high, equities are initially not at risk from a long-term, historical perspective.
Often enough, prices have also risen in line with other prices. This would not entail any risk for you. Even in this phase, the opportunities in the event of inflation on the stock markets remain very good, as there are hardly any alternatives.
The yield on bonds in Germany for government paper is still negative at around -0.2%. Who – apart from the institutions that practically have to (state central banks or even insurance companies) buy such bonds?
Stocks remain the first choice. Moreover, corporate profits have been quite encouraging overall so far this year. There is no reason at all to doubt that corporate profits could now be hit. But experience shows that when corporate profits rise, share prices also adjust. So there is little to worry about.
On the other hand, bonds are unlikely to become more attractive, if only because governments, including our Federal Republic of Germany, are hardly able or at least willing to pay more interest on upcoming new debt than has been necessary to date. Given the enormous COVID burdens, this would be counterproductive from an economic point of view.
Shares Price Rebound
In the U.S. the picture is similar. Bonds are nowhere near so attractive that you need to invest now. The major investors almost certainly see things the same way, so money should therefore be moving into equities in North America as well.
Lo and behold: Prices rose again in the second half of the week last year – even if it initially looked like a major uncertainty. Prices in the Dow Jones have already risen to well over 34,000 points. The Nasdaq is about 4% to 5% short of its all-time highs, and some major companies have already practically regained their highest prices ever.
I expect momentum to be positive once again.