Investing in stocks is an inflation hedge – a new interpretation of the rise in US stocks
(Bloomberg): Called bold or naive, equity investors look utterly daunted by the highest inflation in decades and the resulting surge in long-term bond yields. not showing
The S&P 500 has risen in five of the past six trading days, even as the Fed plans to raise interest rates, the war in Ukraine escalates and Treasury yields surge. As analysts search for ways to explain the situation, one theory gaining ground is that stocks are one of the best assets to own when consumer prices soar.
“In an inflationary environment, equities have a distinct advantage over bonds,” said Lawrence Cratura, fund manager at PRSPCTV Capital. It's nothing," he pointed out. “Companies can raise their prices, just go to your local 7-Eleven and find out,” he said.
While the S&P 500 rose 1.1% from the previous day on the 22nd, the US Treasury market was sold. St. Louis Fed President James Bullard told Bloomberg News that monetary policy needed to be tightened quickly to keep inflation under control. He reiterated his support for raising the policy rate above 3% by the end of the year. Federal Reserve Chairman Jerome Powell said earlier in the day that he would not rule out a 0.5 percentage point rate hike at the Federal Open Market Committee (FOMC) meeting in May.
Between Powell and Bullard's statements, the bond market began to accept a half-point rate hike as a no-brainer, F. L. Ellen Hazen, chief market strategist and portfolio manager at Putnam, analyzed. "The stock market is telling us the economy won't collapse with these rate hikes," he said in a telephone interview.
Looking back at the inflationary periods of the 1970s and early 80s gives us a hint of the divergence between stock and bond markets. Datatrek Research co-founder Nicholas Collas found that inflation rose 159% over the same period, with the house price index rising at a similar pace. The S&P 500 returned 169%, suggesting corporate earnings can keep pace with inflation even as macroeconomic growth slows.