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Is inflation set to derail the market?

Though higher, the figures should be treated with some perspective… 

In everyday life, inflation hits the hip pockets of all of us. When the economy is running ‘hot’, so to speak, inflation can cause a problem as the price of goods and services starts to rise at a rate that will prove challenging to contain.

Posted: 11/08/2021

Why are markets concerned about inflation?

Presently, the market is concerned the Federal Reserve could be required to pursue options such as lifting interest rates and/or tapering the ability to accumulate assets.

What clues can we gain from history?

While the most recent rounds of inflation data have been higher than forecast, the figures should be treated with some perspective.

Coming off a period last year where there was significant pressure on prices amid lockdowns that crippled the economy, today’s numbers look particularly high. Though, it needs to be emphasised, the low base last year is making for a picture that seems more dramatic than it is.

There is reason to believe that this is a temporary spike and one that may smooth out once the bottlenecks adding to pricing pressure have been overcome.

How might inflation impact stocks from here?

In both inflationary and tapering periods where there is any volatility, tech companies such as Apple, Amazon and Alphabet are compelling stocks on account of their ability to compete in challenging environments.

Simultaneously, if inflation does ease back, the stories behind the market’s tech darlings could come to light again due to the calibration taking place now to discount these names.

What about the long-term picture?

The saying that the stock market is not the economy, and vice versa, holds true to the extent that higher inflation should not spell the end for key growth names.

Whilst some stocks may benefit, there is a distinct prospect that an elevated level of inflation passes as soon as it came.

The Federal Reserve may have ample reason to be cautious about higher rates. However – even when that time does come (with plenty of notice, as has been the central bank’s longstanding policy) the stock market may well take the news in its stride, while those trying to time the ‘inflation trade’ could be left behind.

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