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Series 65 Exam Tutor

Inflation and Why it is Bad for Stocks and Bonds

I am sure you know that inflation has been high for quite some time now. With that said, the Fed has been very aggressively trying to reduce inflation and actually they have been somewhat successful. You do not need to watch CNBC to know that prices are high on many types of products. As a example, my lawn company recently raised prices by 20%. I kind of doubt that he is paying workers more money but his input costs have probably gone up.

The Fed combats inflation by implementing tight monetary policy. One example of this policy is the Fed raising the fed funds target rate as well as the discount rate. Well, some of you may know by now that when interest rates rise bond prices fall and wow, have they fallen. Depending on what metric you use, 2022 was the worst bond market in many decades. Bonds are safe right? Not last year... The Bloomberg Barclays Aggregate Bond Index is was lost about 15% last.

Rising inflation and rates is also not good for stocks. For test purposes, common stock protects you against rising inflation but not this year. There are multiple reasons rising inflation and rates are bad for stocks including but not limited to rising interest costs on future debt as well as higher input costs to make products. If debt is more expensive and its costs a company more money to make products, earnings fall, which is probably why stocks are down this year.


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