Last week was the second straight losing week for stocks. Tech stocks and the once darling growth ETFs with outrageous valuations were sold off as another bad inflation report was dropped Wednesday morning showing that the consumer price index was up 7% year over year. This headline number is the largest increase since 1982. It should be noted that inflation numbers are likely higher.
I have been preparing for a higher inflationary environment for the past decade when I first started to learn about investing. The amount of debt in the system has always scared me and it appears that the only way to fix the amount of debt is to hyperinflate our way out of it.
If inflation continues to rage I expect bond yields will increase as investors sell off fixed income assets that yield less than the rate of inflation. This will lead to higher discount rates as the risk-free-rate of return increases and the cost of capital increases. Tech and growth stocks will be disproportionately affected as most of their value comes from cash flows discounted from 10 years into the future vs value where you get stable upfront cash flows.
This theoretical concept that tech valuations will get pounded is already being seen as show in the chart below.
Markets will likely continue to be volatile as inflation numbers increase throughout the year — which I wholly expect. In addition, we have a shorter investing week as the markets are closed today for Martin Luther King Jr. Day.
Stocks are so last year
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