What Investors Need to Know About Inflation: Part 2

What Investors Need to Know About Inflation: Part 2

Posted On July 23, 2021 10:40 am

In part 1 of this series, we examined what’s causing inflation and realistically how bad it might get.

Now let’s see why so many investors are so worried about the risk of rising inflation and how to protect your retirement nest egg from the threat of soaring prices.

Why Investors Fear Inflation

In mid-February rapidly rising 10-year yields helped cause a tech correction. While the broader market barely felt it, the tech-heavy Nasdaq fell by 10%, and many popular hyper-growth names like Apple (AAPL), Tesla (TSLA), and ARK Innovation ETF (ARKK), fell 14% to 30%.

The theory behind many growth stocks investment thesis was that low rates forever would justify permanently higher multiples. How high? In the case of Apple 35X earnings and in the case of ARKK, 116X earnings.

ARK Innovation ETF Valuation: 116X Earnings 4.9 PEG

(Source: Morningstar)

If interest rates rise significantly then the discount rate on future cash flow rises as well, resulting in much lower multiples, and thus tech corrections, and sometimes bear markets.

With the S&P 500 25% tech, and the Nasdaq 50% tech, naturally, tech-heavy growth investors are worried about rising interest rates driven by higher inflation expectations.

How To Protect Your Nest Egg From High Inflation

Here’s the good news about future interest rates, they are very unlikely to soar to levels that could trigger the kind of catastrophic 50% to 70% market crash that some permabears have been predicting for the last 10 years.

(Source: FactSet Research Terminal)

From 1.2% today, economists expect the US 10-year yield to hit 2.5% by the end of 2030.

That’s a doubling of interest rates but over a period of 2.5 years.

According to Goldman Sachs, as…

Continue reading at STOCKNEWS.com


About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

Leave a reply

Your email address will not be published. Required fields are marked *