What is the best inflation hedge
Do stocks protect against inflation?
Unclear economic relationships
To this day, however, economists have not been able to explain why the relationship between stock returns and inflation tends to be negative. There are various theories, none of which have been conclusively proven. Obviously, the only thing that is clear is that the widespread view that companies can keep their real market valuation largely constant even when inflation is high by simply passing on rising prices to their customers is incorrect.
In order to recognize this, complex analyzes are not necessary at all. If you watch the stock market a little, you will quickly find that stock prices do not necessarily follow profits in the short term. Rather, other factors such as monetary policy and investors' willingness to take risks are decisive.
An explanation for the negative relationship between stock returns and inflation also aims in this direction. After that, rising inflation and the associated stronger fluctuations in the price level create greater uncertainty among investors. They then demand higher risk premiums on the stock market - which depresses prices. This thesis is supported by the often negative relationship between stock market valuation, measured as the price-earnings ratio, and inflation. The valuation of the S&P 500, which lists 500 large US companies, was high between 1970 and 2010 when inflation rates were low and vice versa.
In the short term, investors can by no means rely on equities to protect them well against inflation risks. This also illustrates the likelihood of achieving a positive real return on an annual basis with an MSCI World investment. Since 1970, with an inflation rate of more than 5 percent, it has only been around 61 percent. The chances were better if inflation remained below five percent: the probability of a real price increase was then 72.5 percent.
© Fairvalue 02/25/2021
Photography: European Central Bank
Elroy Dimson, Paul Marsh, Mike Staunton: The real value of money, Credit Suisse Global Investment Returns Yearbook 2012.
Own calculations and research
more on the subject
- Are goats smarter than cats and dogs
- Has the world recovered from the global crisis
- What is traditional japanese sushi
- How Canada defines meat legally
- Does fish oil have any beneficial effects?
- What are the benefits of lip kissing
- Is fishing good for your health?
- How authentic
- Bloomberg Businessweek is a liberal magazine
- Is Macron gay
- Can cause moisture to rise through concrete
- Why is it bad to be a teenage mom
- What is your goal in life
- What is the relationship between teacher and student
- McDonalds goes out of business
- What does Kushmanda symbolize about Navaratri
- Why do children hate eating cooked tomatoes?
- Who are your employees
- Is it normal to hate your parents?
- What are the best cello strings
- What do you know about the ERC20
- Are the Netherlands a friendly country?
- What is the crime rate in Australia?
- How does education help in society
- Where does the British breakfast come from
- What ideology killed most of the people
- What do you love about your partner
- How do I motivate old people
- How long is the average lunch break
- Why are you interested in the automotive industry
- Is someone really interested in someone else?
- Why shouldn't engineers do an MBA?
- What are some hidden gems of food
- How many Hindus currently live in Pakistan