Key learning points
- If inflation rises, the Fed will respond by raising interest rates. The end result is market volatility and stock dumping.
- It’s tempting to ditch stocks to liquidate your wealth in uncertain times.
- Not all companies are equally affected by high inflation, it is important to adjust your portfolio before dumping your stocks.
With inflation rising in 2022 and hitting a 40-year high last June, we are already starting to see the impact of stock market volatility reflected in everything we buy. Yesterday was a good example of that volatility. Many investors have sold their stocks throughout the year due to fear amid market uncertainty. Whispers of an extended period of inflation leading to a possible protracted recession are increasing in volume and speed.
When inflation rises, investors begin to dump stocks as panic hits the stock market. As the Federal Reserve tries to contain inflation by raising interest rates, the effects are being felt in the stock market, where volatility is leading to panic selling. There’s no denying that inflation is scary. You should see the prices of everything around you rise as your investment returns decline. This is essentially why the idea of dumping inventories becomes common during periods of high inflation.
We’re going to consider the idea of dumping stocks because of inflation, and focus on what you need to know so you don’t lose hard-earned money and miss out on future returns.
Why are people dumping stocks at a time like this?
As we get closer to an official recession, many investors are nervous about the stock market. Perhaps the most important reason is that high inflation leads to volatility in the stock markets. With such volatility, it is common for investors to panic and liquidate their assets and sell stocks at a loss.
So why exactly are people dumping stocks because of high inflation?
The economy is slowing down
Your purchasing power decreases as the price of goods and services rises. The economy generally slows as people wait for a return to stability. When that happens, shares of companies in the stock market begin to decline. Therefore, many investors are starting to dump their stocks because they are less valuable than they once were.
Interest rate hikes cause volatility
As inflation begins to rise, the Fed is beginning to take action by raising interest rates to keep inflation in check. As a result, borrowing money becomes more expensive, which means that excess capital is removed from the market. When interest rates rise, many companies struggle as they use debt as leverage and the interest payments on their debt also increase. Ordinary people will feel the effects of higher interest rates as it becomes more expensive to borrow money to buy a house, a new vehicle or even the latest technology.
Investors don’t like uncertainty
We can’t underestimate the fact that most people don’t like the uncertainty that comes with a recession, which is often caused when the Fed is fighting high inflation and the entire economy is centered. Unfortunately, we have been spoiled with a bull run and solid gains since March 2009 at the bottom of the great recession. Many investors decide to cash out at signs of our current economic turmoil.
Cash is king, according to some
Returning your principal becomes more important to some people than returning your principal. There’s nothing worse than watching your investment portfolio fall in value, wondering if you’ll ever be able to get your finances back. For risk-averse people or short-term investors, cash can be an important asset in your portfolio.
Inflation causes the price of everything to rise
High inflation means that everything is now more expensive. The cost of living is rising, so people may start dumping their stocks to access their money. Deciding how to combat the increased cost of everything is a challenge for most of us. So many investors decide to liquidate their assets.
There are better investments when inflation is high
Equity market returns don’t seem as impressive when inflation is above 8%. This means that if you don’t make at least 8% on your money, you’re not tracking it. Investors are looking for better ways to invest their money so that it doesn’t feel like it’s not taking sensible financial steps. As a result, some people dump stocks in favor of other investments (from gold to real estate).
Business growth slows
Business investment becomes more expensive when the Fed raises interest rates to curb inflation. When this happens, companies have to postpone major projects because they struggle with financing. This makes some stocks less attractive, so investors may start selling stocks if they don’t think the company will be able to grow as expected.
Investors use leverage
Many stock market investors also use leverage by taking out margin loans to invest in stocks. If interest rates rise, these margin loans become more expensive and it is suddenly no longer a good idea to take these risks. Therefore, these investors are starting to sell and consider dumping their stocks for better investments.
All these consequences of high inflation have the same result: stocks are sold almost regardless of the share price. Many companies with strong financial results lose value by not making mistakes themselves. When investors start dumping stocks, the market panic sets in and more people start dumping their stocks. This leads to days of massive sell-off where markets are in turmoil.
Should you sell stocks because of inflation?
Is it worth selling your shares because of inflation? While it’s easy to urge you to hold on, the reality is that it won’t always be easy to sit on your hands and watch your portfolio lose value. Some investors just need the money for other things. Still, we need to remind you of the old investment adage that: time in the market is better than time the market.
It is impossible for a single investor to know consistently when the right time will be to sell your stock for the highest possible return. You can sell to the bottom and then regret dumping your stock by missing the recovery and be afraid to get back in. You don’t want to miss out on long-term gains because you panicked and sold too quickly.
It’s also worth noting that not all stocks are equally affected by inflation. When the prices of goods rise, consumers can become more budget conscious so that they spend less, leading to less revenue for some businesses that would fall under the category of discretionary spending. However, stocks in the energy sector are likely to keep up with inflation, as people still have to spend money on utilities. Other industries tend to do well even in times of high inflation or recession (such as healthcare or consumer goods). So while tech companies are struggling to keep up with inflation due to lower consumer spending, other companies will continue to meet revenue expectations.
When should you sell your shares?
Some people are long-term investors. Others invest for the short term (such as saving for a wedding, buying a new home, or other short-term goal). There will be scenarios where it makes sense to sell your stock: for example, if you need to have cash to make a big purchase in the near future. If you need money for your wedding or a down payment for a new home, consider selling your stock.
But it’s an important reminder that it’s never a good idea to sell your stocks in a panic because of a turbulent day in the market. If your money is invested in companies or funds that perform well, there is no point in letting the volatility of the market lead you to a series of short-sighted decisions.
There may also be a scenario where you find an investment that will give you better results. With an inflation rate of 8%, you should find investments with a return rate of 8% to keep up. If you are considering investing in another asset or possibly returning to college to expand your skills during this period of uncertainty, then you may benefit from selling your stock.
Bottom line on inflation and investing
Inflation has a different impact on every business. Warren Buffett’s legendary investment philosophy is that you should be afraid when others are greedy and greedy when others are afraid. This is easier said than done, no one wants their account to fall in value. That said, you can still invest your money in times of high inflation and market volatility.
You can also make your portfolio more defensive to handle the uncertain times. Check out Q.ai’s Inflation Kit and protect your investments from depreciation. In fact, you can activate Portfolio Protection at any time to protect your gains and reduce your losses, no matter which sectors you invest in.
Download Q.ai today to access AI-powered investment strategies. When you deposit $100, we will add an additional $100 to your account.