Aswath Damodaran, professor of finance at NYU’s Stern School Of Business, and Chris Senyek, Wolfe Research chief investment strategist, joins ‘The Exchange’ to discuss tech companies carrying the market, disparities between old and young tech, and the macroeconomic picture….(read more)

LEARN ABOUT: Investing During Inflation

REVEALED: Best Investment During Inflation

HOW TO INVEST IN GOLD: Gold IRA Investing

HOW TO INVEST IN SILVER: Silver IRA Investing

Stocks Won’t See Sustainable Rally Without Clarity on Inflation, Says NYU’s Aswath Damodaran

As the global economy struggles to recover from the devastating impact of the COVID-19 pandemic, investors are eagerly watching stock markets for signs of a sustainable rally. However, according to renowned finance professor Aswath Damodaran from New York University’s Stern School of Business, the key to a sustainable rally lies in gaining clarity on inflation.

Inflation, or the general increase in prices over time, can have a significant impact on financial markets. It affects the purchasing power of consumers, the profitability of businesses, and ultimately, the performance of stocks. Therefore, understanding inflation is crucial in assessing the long-term prospects of equities.

Professor Damodaran argues that without clarity on inflation, investors are left grappling with uncertainty, which can hamper the sustainability of any stock market rally. In an era of unprecedented fiscal stimulus, with governments injecting vast amounts of money into the economy, concerns about inflation have grown.

While central banks, such as the Federal Reserve in the United States, have been assuring investors that any uptick in inflation would be transitory, investors remain cautious. Rising prices in certain sectors, such as housing and commodities, have only fueled these concerns, leading to greater volatility in the stock markets.

Damodaran emphasizes that sustainable rallies in stocks require a stable and predictable inflation environment. Investors need to be confident that prices will not spiral out of control, eroding the value of their investments. This confidence breeds optimism and encourages buying, creating a virtuous cycle that contributes to sustained market growth.

Clarity on inflation is especially crucial for certain sectors that are particularly sensitive to changes in prices, such as technology, consumer goods, and commodities. These sectors depend heavily on stable pricing to forecast future revenues and make investment decisions. Without a clear picture of inflation, these industries are left in a state of limbo, making it difficult for investors to accurately value companies and assess their growth potential.

Damodaran’s call for clarity on inflation aligns with the concerns raised by many analysts in recent months. The fear of inflation is not unfounded, given the extraordinary measures taken by governments worldwide to combat the economic downturn caused by the pandemic. While these measures were essential to prevent a collapse, their long-term consequences remain uncertain.

Debate among economists and policymakers continues as to whether the current inflationary pressures are temporary or represent a more persistent trend. The outcome of this debate is crucial for investors seeking clarity in their stock market decisions. As Damodaran highlights, without this clarity, the growth potential of stocks is hampered, and the sustainability of any rally remains in question.

In conclusion, stocks require clarity on inflation to support a sustainable rally. Investors need confidence that prices will remain stable and predictable, enabling them to accurately assess the value and growth potential of businesses. Aswath Damodaran’s cautionary stance serves as a reminder that until inflation concerns are resolved, stock markets may continue to experience volatility and uncertainty.