Derek Horstmeyer
speaker
43 appearances
1 recordings
1 series
first heard Jun 2022
last heard Jun 2022
Derek Horstmeyer’s voice in public audio — every appearance, attributed to the second.
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As the cost of input goods for companies go up, this compresses margins and leads to lower profits for companies where they cannot pass along these costs to the customers.
This is actually a really good question.
Inflation affects our stock market for a multitude of reasons.
First, as the cost of input goods for companies go up, this compresses margins and leads to lower profits for companies where they cannot pass along these costs to the customers.
You can think of this happening in sectors of the economy where customers are very price sensitive, like consumer staple companies such as Walmart or Procter & Gamble.
Second, as the costs of goods go up for the consumers, they have less disposable income to spend on things like going out to restaurants, trips abroad, or large new car purchases.
This primarily drives down stock prices of companies in the consumer discretionary space, the travel space, and the large goods industries like car manufacturing and housing.
The whole idea behind interest rate sensitivity is that as the Federal Reserve
raises rates, this will naturally bring down the valuation of companies for a number of reasons, including the idea that borrowing costs to run a business are now higher.
Some industries will fall more in value than others when interest rates go up.
These most interest rate sensitive industries are typically thought of as tech and consumer discretionary.
Since the start of the year, we've seen our most speculative and high-flying tech companies fall the most.
This really is not just hit the companies with little revenue, but also some really well-known companies like Netflix are down 60% since the start of the year.
So, yes, a lot of people say buy real estate when you see inflation ticking up because it's going to exactly track that inflation.
What we observe when we actually look at the stock market is that real estate in the form of real estate companies or what we call REITs actually underperform most other sectors.
The reason why is primarily because the interest rates that are going up affect the returns on these industries and these companies the most.
What we observe is that when inflation ticks up, we see that energy companies and material companies, companies that are in the mining industry or in the commodities industry, tend to do very well.
The reason why we see energy and materials companies do very well is because their revenues come from commodities for the most part.
And when inflation is going up, it usually means commodity prices around the world are going up.
oil, gasoline, all of these are commodities that tend to go up with inflation.
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