Growth and tech stocks could be in for another surprise with rising inflation
Inflation is a deadly word for growth stocks and fears of rising inflations have investors on edge.
Inflation is an increase in the price level of goods/services in the economy. Too little or too much is seen as bad for the economy so economists look to keep inflation at 2%.
At the start of COVID, falling prices of goods and services sent inflation to a low of 0.1% in May. Since then, inflation increased back to 1.7% in Feb. from an increase in energy/electricity prices and massive amounts of stimulus into the economy.
And now, a $1.9t stimulus bill passed yesterday has analysts forecasting even higher inflation — from higher consumer spending and higher prices.
How inflation could be deadly for growth stocks
If inflation gets too high above the target 2%, governments can try to lower inflation by raising interest rates. The fear of rising interest — which is seen as a negative for growth stocks — is what’s worrying investors.
According to a survey with economists by WSJ:
- 80.6% expect inflation to rise above the target 2% due to the latest stimulus package
- 85% don’t see the Fed increasing interest rate until 2022 or later
For investors… What performs well during high inflations?
- Consumer companies that can increase prices without a big impact on demand — i.e. Strong brands like Nike ($NIKE), Lululemon ($LULU)
- Energy and commodity stocks tend to perform better during rising inflation — i.e. Oil prices often rise alongside the economy
- Financial stocks benefit from higher interest rates — i.e. Banks like JPMorgan ($JPM) and Bank of America earn more from higher rates on loans
The deadly scenario: over the past 2 weeks, tech stocks saw its biggest correction from rising interest rates. If we begin to see strong inflation, the Fed could be forced to raise interest rates even further — which could send tech stocks in for another wave of volatility.