The invisible forces behind stock prices
Inflation and interest rates are macroeconomic forces that affect all stocks — no matter how well an individual company is doing.
"The one who understands the forces around them is never at their mercy — they use them."— Florence Scovel Shinn
What is inflation?
Normal inflation
2% per year is the target of most central banks. Prices rise a little, wages rise a little, and the economy grows steadily.
High inflation
5-10%+ per year is problematic. The central bank must intervene with higher rates — and this hits the stock market.
Key rule
Rule of thumb: Interest rates up = stocks down. Interest rates down = stocks up.
Which stocks are most vulnerable?
Most vulnerable
Technology stocks — dependent on cheap capital
Real estate companies — lots of debt
Growth companies — valued on future earnings
Most resilient
Bank stocks — earn more when rates are high
Energy stocks — more affected by oil price
Consumer staples — people buy food regardless of rates
"Everything is connected to everything. The one who sees the whole always has an advantage over the one who only sees the part."— Florence Scovel Shinn