Would inflation benefit small cap stocks?

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Blue456
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Would inflation benefit small cap stocks?

Post by Blue456 »

Would inflation benefit small cap stocks?
JBTX
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Re: Would inflation benefit small cap stocks?

Post by JBTX »

I think if you go back to the late 70s small cap fared better than large cap. Whether that applies to future inflation remains to be seen.
jimkinny
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Re: Would inflation benefit small cap stocks?

Post by jimkinny »

How much inflation?
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Blue456
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Re: Would inflation benefit small cap stocks?

Post by Blue456 »

jimkinny wrote: Sun Oct 18, 2020 5:05 pm How much inflation?
Lets say consistent moderate inflation 5-7% per year.
borad
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Re: Would inflation benefit small cap stocks?

Post by borad »

I think the logic is that small companies carry a greater proportion of debt, and higher inflation would melt that debt away.
Last edited by borad on Sun Oct 18, 2020 8:50 pm, edited 1 time in total.
traderlmd
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Re: Would inflation benefit small cap stocks?

Post by traderlmd »

I barely even understand the concept of high inflation (7%+) hurting stocks to begin with. It seems like inflation would be good for a company's profits. Can anyone explain this?
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firebirdparts
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Re: Would inflation benefit small cap stocks?

Post by firebirdparts »

traderlmd wrote: Sun Oct 18, 2020 8:38 pm I barely even understand the concept of high inflation (7%+) hurting stocks to begin with. It seems like inflation would be good for a company's profits. Can anyone explain this?
It is. However: Current value of any financial instrument has to be judged based on future value. If interest rates rise, then the growth of nominal future earnings is canceled out by the cost of capital. There is that “if” in there. Interest rate and inflation are two different things. They are connected by monetary policy.
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traderlmd
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Re: Would inflation benefit small cap stocks?

Post by traderlmd »

firebirdparts wrote: Sun Oct 18, 2020 8:47 pm
traderlmd wrote: Sun Oct 18, 2020 8:38 pm I barely even understand the concept of high inflation (7%+) hurting stocks to begin with. It seems like inflation would be good for a company's profits. Can anyone explain this?
It is. However: Current value of any financial instrument has to be judged based on future value. If interest rates rise, then the growth of nominal future earnings is canceled out by the cost of capital. There is that “if” in there. Interest rate and inflation are two different things. They are connected by monetary policy.
Ya, this is the most common answer I've found whenever I read about this kind of thing online and I kind of came to the realization of what you seemed to be hinting at in the last couple of sentences in your post. Whenever I read about why high inflation would hurt stocks, the explanation always seems to be of why high interest rates would hurt stocks (a concept that is very understandable). I realize that the two are extremely connected - there's no historical example of inflation increasing drastically without interest rates doing the same - understandably - why would the fed let inflation run away without raising rates? So it seems that the answer is that inflation would indirectly hurt stocks - that it isn't the inflation itself that would hurt stocks but the high interest rates that would come with inflation. At least, this is my take away after having read so many articles that are trying to tackle the topic of why inflation hurts stocks only to ultimately talk about why high inflation would hurt stocks.

Or...is there any reason that inflation itself would hurt stock? If there was a case were inflation rose to 10% but interest rates stayed very low (I know, this would never happen, but if it did) would stocks still underperform? Could inflation, itself, hurt stocks?
Northern Flicker
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Re: Would inflation benefit small cap stocks?

Post by Northern Flicker »

Inflation increases the cost of operating a company's business and increases revenue, but these may not move in lockstep.

Inflation reduces the value of debt in real terms, with the benefit of lowering a company's debt load.

Higher interest rates lower the present value (stock price) of future cash flows (corporate revenue) by increasing the discount rate.
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Theoretical
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Re: Would inflation benefit small cap stocks?

Post by Theoretical »

Inflation would benefit the most heavily-leveraged companies in general. It's one of the reasons why junk bonds are considered partial inflation hedges, because even while the coupons get closer to (or even surpassed by) treasury interest rates, the credit quality of those bonds increases because they're more likely to get paid on time and in full.
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