Inflationary concerns are on the rise, which has weighed on supply chains and overall valuations -- should investors still be buying stocks?
Nov. 26, 2021
Freefalling stocks have sent investors into a panic with the age-old questions cropping up; is it time to sell? Will markets rally? Is this just a short-term correction?
And of course; "where do I invest if inflation is rising?"
Inflation and its impact
The annualized inflation rate in the U.S. is now sitting at 6.2% -- that's the highest it has been in more than 30 years, so yes, it's something to keep in mind. However, in periods of inflation, investors can be more concerned about preserving wealth, rather than creating it.
Many asset classes spring to mind; cash, stocks, property, commodities like gold and silver, and given its popularity now, crypto is on investor's radar too. Let's compare the options.
Asset Classes
Cash
Savings accounts are at a loss; with interest rates still at record lows, any money left lying up in savings are losing 6.2% of their value now, per year.
Gold
Gold has historically been the go-to inflation hedge, due to its nature as a store of value. The keyword here is hedge -- you won't necessarily make a return by investing in gold, but you may limit your losses compared to keeping money in cash at least.
Property
Property is actually a good choice, once the demand is there. Most recently, this was the case in states like California where we saw demand-push inflation -- this is where demand outweighs supply, and in this case, it causes home prices to rise. It's quite normal, especially in prime real estate areas, despite many commentators screaming "property bubble!".
The 2008 property crash, will always run shivers down investors' spines, but in general, property is quite stable. It does, however, come with the consequence of being highly illiquid i.e. it takes time to sell property, you can't just submit a sell order on your phone or desktop.
Another thing to note is the taxation on income from property, which will vary, depending on where you are living.
Crypto
The crypto argument as an inflation hedge has been made, but there's no actual track record. The space only has a 12-year history to look back on, during a period of relatively low inflation in developed economies so there's uncertainty as to how crypto will actually respond. It doesn't necessarily correlate identically with the stock market, but it has reacted similarly during levels of high market volatility.
Contrary to the savings account argument, some crypto brokerages offer staking services (earning interest on your crypto assets essentially) that could combat inflation, but in doing so, investors would be entering a market of wild price swings and no regulation or protection.
Stocks
Surprise, surprise. The stock market guys are going to say the best place to be during inflation is the stock market.
Pretty much.
Stocks or equities have historically outperformed all other asset classes over the long run -- in the short run, not so much -- this is why we always preach for investors to think long-term.
Not that it's perfect; some stocks will outperform in periods of high inflation, while others will struggle, but markets eventually stabilize.
This is because rising costs are passed on to consumers by businesses, also known as cost-push inflation -- wow, I feel like I'm back in high school economics class -- but this means company revenue, sales, and profits also rise, so businesses aren't really at a loss.
Where it becomes an issue is with wages; increased labor costs for businesses can be harmful or income disparity for individuals if wages don't increase in line with inflation (generally the case).
All in all, nothing beats a diversified portfolio of assets when managing wealth, but for the reasons outlined above, stocks are a winner long-term.
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