Inflation and equity markets - Higher inflation is not better

 

Equity markets like low inflation regardless if inflation is rising or falling. On the other hand, equity markets do not like higher inflation. especially if it is rising. The relationships are not precise and there will be significant differences based on sector, but we do know that high inflation will hurt multiples with earnings compression, higher financing costs, lower expectations for valuation, and more uncertainty.  See "Which equity sectors can combat higher inflation?" from Hartford Funds.

Financial will be affected by the real rate and what the Fed will do. Energy and materials will do better if prices increase can be passed-through to consumers and businesses. Real estate should do better in high inflation, but again, there is an issue of financing. In general, the impact of inflation on equity returns can be very complex. While past inflation environments have been counted, we cannot make clear judgments concerning the current environment where inflation is falling but growth may also be declining.