The US stock market fell on Friday and Monday in large part due to fears of inflation. The logic goes: economy is doing well, inflation is creeping up, Fed might get over-eager and raise interest rates too much, companies might have difficulty making profits, stocks might sink. This all brings a few thoughts to mind:
- Of course there will be some inflation. There has been $12 Trillion (with a T) of quantitative easing since 2008 on a $18 Trillion US economy.
- There has been an 8 year bull market, almost quadrupling since 2008.
- Even though stocks fell over the last few days, looks like this enormous run
Stock market returns have been great
Look at this 1 year Finviz map of returns. In spite of the last few days, Google still up 31%, Walmart up 51%, Amazon up 78%, Boeing up 103%. The overall market was up 18% last year. 
The US is lucky; it is the global default currency (for now). People still want dollars – thank goodness. Also, let’s agree that some interest rate increases are better than inflation. If the economy is really starting to overheat, then it’s better to start cooling it down.
Hyperinflation is worse
Venezuela hyperinflation. Apparently, the prices in Caracas are doubling every few weeks. WSJ reports how dire it is here. People are spending currency as soon as they receive it, because it will inevitably be worth less tomorrow. The government has increased the money supply 14x over the last 12 months. The value of the bolivar has dropped 98%. Wha? Talk about economic dysfunction. Interests will go up. This is a fact. Most analysts expect 3 rate hikes in 2018. The 10 year bond is currently at 2.8, which is still crazy low. Was not really that low since the 1960s.
When rates go up, expect a lot more volatility.
Bond yields will go up, and bond prices will go down. Equities will (trend lower) as there is more competition from bonds and other income-producing investments. The easy money days will start to fade quickly. As strategists, don’t forget the macro-economic factors. Trust me, when you WACC goes up 100-200 basis points, you gotta work harder, much harder. Related posts: