The most important issues in the stock market valuation is the relationship between stock prices and inflation. Often in this context, the opinion is expressed with rising prices and increased corporate profits and stock prices. Is this fact or context Illusion?
To assess the effects of inflation on the investment performance of stocks investors access often resort to the experience immediately after the two world wars. Those periods were marked by sharp devaluations in Europe. Here were the owners of shares to a much lesser degree of inflation and monetary reforms affected than, for example, holders of fixed-income securities or cash that their principal part completely has lost.
Is an equity owner that is hedged against inflation risks? The economic Logic says at first sight for it. After all, rising prices mean for the Companies increasing sales revenues and – if the cost is not greater increasing increasing – also increasing profits. Often, in this context also noted that after a share as a physical counterpart Capital stock stands, which constituents a real size and its value to inflation can not be eroded. The nominal value of the company must exist before in the level of general inflation are growing.
In summary, so in the context of this argument: Because shares to the real capital and the derived from it belong (real) gains, contracts a price increase both earnings per share and the stock price equally with the top. In this case, would be both future dividend payments and stock prices, So the "surrender value" inflation-proof because of the adjustments to the price increases. Some different experiences from the past, however, speak for to question this argument. While no one disputes that for very long Periods of time – about a century – with gains across price indices and stock indices are highly correlated – that move in unison. Over short and average periods – such as within a decade – but sometimes it looks different from. In particular, the experience of the violent cyclical fluctuations in the seventies, eighties and nineties show more of an inverse reaction of inflation and stock market.
In the following, this connection, some systematic considerations be given. This process takes place, the following stations: the effect could pass on, the business is expected inflation Profit margins (ratio of unit profits to costs) do not influence. A look at the empirical research in recent decades, however, speaks clearly against this These (see accompanying chart). The relationship between inflation and Profit margin seems to be rather negative.
There are several explanations: The simplest returns to the time lags between changes in costs and price adjustments: entrepreneurs do not change their monthly sales prices, but usually only once or twice in the year. In addition, Increases in costs generally will not fully pass on immediately, but only step by step. The second approach reflects to the central bank behavior. Respond to these inflationary processes with a tightening bias, so does this through various channels to the overall economic development, thereby Passing options limited by cost increases in the prices be.
In addition, structural changes contribute to a pressure on the Profit margins at: entrepreneurs need in their pricing policy, the reaction keep track of customers. In these times of rising inflation rates tend strengthened to invest more time for price comparisons and alternative offers. Prices will then quickly run a company risks losing market share. As a result, it runs a conservative price policy with the result of falling Profit margins.