Stock Market Inflation, Why Value Stocks Outperform Growth Stocks: If you’ve ever read a stock market history article, you’ve probably noticed that stocks with low inflation have outperformed those with high inflation.
As a matter of fact, it’s a well-known fact that equities outperform inflation 90% of the time when the prices are low, rising, and at their highest. During these times, stocks even outperform a coin toss. So, what’s the secret? Read on to find out.
Stock Market Inflation, Why Value Stocks Outperform Growth Stocks
Value Stocks Perform Better When Inflation Is High | Stock Market Inflation
When inflation is high, value stocks tend to perform better than growth stocks. Inflation in the 1980s was high, but value stocks had stellar returns because they started at a bargain price. This trend reversed during periods of low inflation or deflation. According to Yale professor Robert Shiller, value stocks outperformed the market at year-end, with the highest P/E ratio since the technology stock bubble burst 21 years ago, and the highest cash flow yield since 1929.
Growth Stocks Tend To Underperform In Times Of Rising Interest Rates
While higher interest rates can disrupt stocks, they also provide an upside opportunity. In addition to disrupting stocks, rising interest rates can lead to violent sector rotations. In the past, higher interest rates tended to boost stock prices. But rising interest rates can also dampen growth. As the economy slows, investors may shift toward fixed income markets or more stable companies. This can be a good thing in the short run, but investors may want to avoid a growth-oriented stock in the future.
Rising Interest Rates Increase The Cost Of Doing Business
As interest rates rise, your costs will also rise. As a business owner, you know that higher interest rates can limit your cash flow. But how does this affect your business? If you sell products that require financing, your customers will likely delay their purchases. Similarly, if you provide professional services, the demand for your products and services will change. Regardless of the cause, rising interest rates can be a major setback for your business.
Walmart’s Quarterly Profits Have Fallen For The First Time In Many Years
The rise in gas prices and food inflation have caught Walmart off guard. The company’s supply chain has been affected and this has impacted its earnings. Meanwhile, labor costs were unusually high in the first three months of the year. That’s because Walmart had to hire replacement workers for those who were out with the coronavirus. As a result, Walmart overstaffed, which further hurts its bottom line. Walmart also cited higher food inflation, which is impacting consumers’ ability to spend.
Fed Plans To Raise Interest Rates Three Times In 2022 To Curb Price Increases
The Federal Reserve is widely expected to raise interest rates in March, which will raise the cost of borrowing by a quarter percentage point. With inflation rising at a rate of 8.5% this year and wages increasing at a rate of 5%, more hikes will likely be in store.
However, Jerome Powell, Fed chair, warned that if inflation is not brought under control, there will be more astronomical increases. Despite that, he did not declare victory over the inflationary trend anytime soon.