There are no steadfast “rules” that drive stock prices up or down. If there were, you and I would both be rich. But, there are situations that *tend to* provide tailwinds (stimulus) or headwinds (recessions) to the stock market. In today’s video, Azul explains why inflation can sometimes be a dampener for stock prices.
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Why Did Stocks Crater When Inflation Took Off? (TINA vs TAMMY)
Inflation is a term that sends shockwaves through the financial markets. It is often accompanied by a decline in stock prices, which evokes confusion for many investors. The question arises: why do stocks crater when inflation takes off? To understand this phenomenon, we must delve into two competing theories: TINA and TAMMY.
TINA, an acronym for “There Is No Alternative,” is a concept that has prevailed in the financial markets for quite some time. It suggests that in an environment of low interest rates and subdued bond yields, investors are left with no other option but to invest in stocks. This theory gained further traction in recent years, as central banks across the globe adopted accommodative monetary policies to counter the economic impact of the COVID-19 pandemic.
With interest rates hovering near historic lows, the stock market became an attractive destination for investors looking for higher returns. However, when inflation takes off, it disrupts the TINA narrative. Rising inflation erodes the purchasing power of individuals, leading to increased costs of goods and services. Companies face higher input costs, such as raw materials, energy, and labor, squeezing profit margins. As a result, investors anticipate a decline in corporate earnings and, in turn, stock prices.
Enter TAMMY – an abbreviation for “There Are Many Alternatives.” This theory challenges the notion of TINA by suggesting that there are several other investment avenues available to investors when inflation starts to rise. Traditionally, fixed-income assets like bonds become more attractive during inflationary periods as they provide higher interest payments. Additionally, commodities like gold and real estate have historically acted as hedges against inflation.
When inflation starts accelerating, investors may choose to diversify their investment portfolios by allocating funds to these alternative assets. This diversification away from stocks puts downward pressure on stock prices, leading to the observed “stock cratering” phenomenon.
Moreover, inflation affects investor sentiment and market dynamics. Fears of an overheating economy, increased borrowing costs, and uncertainty about future interest rate hikes can significantly impact market sentiment. Investors may become more risk-averse, opting to sell stocks and transition to safer investments or cash. This increased selling pressure exacerbates the decline in stock prices during inflationary periods.
It is worth noting that the impact of inflation on stocks is not uniform across all sectors. Some industries, such as commodities or energy, may benefit from higher prices, while others, like technology or consumer discretionary, may face challenges due to increased costs. Consequently, sector rotation and specific stock selection become crucial during periods of rising inflation.
In conclusion, the “stock cratering” phenomenon during inflationary periods is a result of two competing theories: TINA and TAMMY. In times of low interest rates, stocks become an attractive investment option, leading to a surge in prices. However, when inflation takes off, eroding purchasing power and increased costs squeeze corporate profits, causing stock prices to decline. Additionally, investors may seek alternative investment avenues, putting further pressure on stocks. Understanding these dynamics becomes crucial for investors navigating volatile market conditions driven by inflation.
What’s the city you guys moved in ? I am looking for cheaper good cities to live. Appreciate it
Vlog on vanguard, passive vs managed assets
Look at the markets over the last 20 years? Generally about the same growth? Ups and Downs but generally the same amount being invested? All the 401k 403b IRA Money being invested every 2 weeks no matter what and it has to go some where? Ite index funds grow becuz money keep coming no matter what? As Boomers are Retiring and starting to take out more than goes in the markets will start going Down no matter what? It is so obvious? No only event related but also plain fact we put it in and now we are taking it back out?
Hopefully come 2024 and beyond sanity will return along with less inflation!
Hi Azul, I like stocks that pay a dividend. This is great because you are being paid just for holding the stock. I also like to re-invest the dividend. With most brokerage funds you can set this up to be automatic. If you do re-invest the dividend , this is called compounding. This is how you can really make money in the stock market. Also banks also use compounding too. But they use it against you. That is how they make money. You could make several videos on the concept of compounding. How it work for you and also how banks use it against you if you have a loan with them. Thoughts?
What do you think of QQQM?
Hi Azul, I have an idea for a video. "5 reasons not to move to California". Can't wait to hear your thoughts!
Inflation is the rich stealing from the poor.