Impact of US inflation on your investment portfolio


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Mumbai: The US Bureau of Labor Statistics announced that the consumer price index for the month of August will increase by 8.3% on an annual basis. It has now been 6 months since the CPI in the United States continues to soar above the 8% mark. Soaring inflation has other implications as well.

With consumer prices in the United States remaining above the 8% mark, the next victim of inflation could be your investment portfolio. Yes, you read that right.

Historically, with rising inflation, equity valuations also end up suffering.

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Since World War II, persistently high inflation has led to an overheating of the US economy. Historically speaking, long-term inflation has inevitably led to recession in the United States of America.

As the Federal Reserve and other central banks work to reduce inflation, interest rate hikes are one of the most powerful tools available to these central banks. A rise in inflation is generally followed by a rise in interest rates and stock market investors react strongly to changes in key rates.
Inflation6A
Inflation6A
On May 11, when the US Bureau of Labor Statistics announced a CPI of 8.6%, the Dow Jones fell 1.10%, while the S&P 500 was down around 0.33%. It’s not just Wall Street, the Dax fell 0.60% on May 12, while the Hangg Seng lost more than 2%.
Inflation6B
Inflation6B

Similarly, when on June 10 consumer price inflation hit 9.1%, the Dow fell 2.73% and the S&P lost 2.90% and the loss continued the next day. also. On June 11, the Dax fell by 2.40% and the Hangg Seng fell by around 3.30%.

Inflation6C
Inflation6C

On July 13, when the United States announced a certain slowdown in inflation, but still standing at 8.5%, the fall on Wall Street was again seen, but it was certainly more controlled. The Dow Jones and S&P lost less than 1%. Continuing the trend, international markets also escaped some of the losses from the previous two months. On July 14, the Dax was down 1.90%, but the Hangg Seng was down around 0.20%.

If you look at the components of the S&P 500 in the second quarter of this fiscal year, they seem to have performed quite well. The companies in the index reported earnings growth of 6.7% and revenue growth of 13.6%. However, when you look at the index as a whole, year-to-date, the S&P 500 is only up about 1%.

So why are investors worried about rising rates? Well, rising rates have a direct correlation to stock performance… Some stocks do better, some don’t. Growth stocks are particularly sensitive to changes in interest rates. This is because the fund managers of these growth stocks use a discounted cash flow model to assign values ​​to these stocks. With rising interest rates, fund managers tend to place less value on growth stocks.

Well, how’s the road ahead for your wallet? Can’t say it will get better anytime soon.

Most analysts expect the US Federal Reserve to continue raising rates. On the other hand, many believe that inflation may have peaked, but is likely to remain high. So the gloomy mid-winter may not just be a possibility for Europe, but also for global equity investors.

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