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How Does Inflation Affect the Stock Market?

Inflation impacts the stock market because the prices of goods and services increase, and people’s purchasing power decreases. This, in turn, affects companies’ performances, which can affect the markets.

🤔 Understanding inflation’s impact on the stock market

Inflation refers to the trend of increasing prices on consumer goods and services over time—and the resulting reduction of consumers’ purchasing power.

Inflation generally means that there’s a greater demand for goods and services than a supply of them, which translates to shortages and, ultimately, hefty price jumps.

Economists measure the upticks and downticks to find the inflation rate. Many central banks aim to keep the inflation rate around two to four percent each year. However,it jumps much higher as Americans are spending more, but affording less.

Here are some obvious industries in which we feel the impact of inflation the most:

  • Housing market
  • Food sector
  • Fuel economy
  • Consumer goods

But inflation doesn’t just affect one industry or another at a given time. It impacts the entire economy and the stock market as a whole.

However, it’s important to note that most economists generally consider inflation to be neutral—neither good nor bad. They largely agree that, while inflation can take a toll on people’s pockets and the stock markets, inflation is sometimes a sign of economic recovery.

What this means for you

If inflation is high, your money won’t go as far. This means two things:

  1. People buy less goods and services, which hurts companies’ performances, which could hurt your portfolio.
  2. The dollars you’ve invested in your portfolio carry less weight because inflation decreases the value of a given currency.

There are two key areas affected by inflation that investors should watch:

  1. Supply chain
  2. Consumer stocks

Bottlenecks in the supply chain force companies to increase their prices. Even some companies or industries that don’t directly witness colossal changes in demand may have to cut down on their supply and bring up their prices in response to other shortages, somewhere along the way, affect them.

Meanwhile, consumer stocks tend to be more volatile during periods of high inflation. Never mind that you could end up overpaying for stocks amid high inflationary times, and, when inflation inevitably declines again, so could those inflated earnings you’ve had.

One way how to protect against inflation is to diversify, diversify, diversify. Your portfolio should be diverse across alternative assets and industries alike.

Q.ai’s Inflation Kit will handle diversification for you. Learn more about the Inflation Kit and what it can do for your investments.

Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

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