Real Inflation Fighter of the Stock Market May Surprise You

Real Inflation Fighter of the Stock Market May Surprise You

Real Inflation Fighter of the Stock Market May Surprise You

With inflation still increasing and with US stock dropping 4% in August and 16% so far this year, many people suddenly seem to ask if we are in a sad market repetition of 1966-82.

The best investors always consider the worst scenarios. And market scenarios do not become much worse than the stagflation period that started during the Vietnam War.

On February 9, 1966, the Dow Jones Industrial Average was closed at 995.15. On August 12, 1982-16 ½ years later – Dow’s closing value at 776.92.

This 22% drop does not include the positive effect of reinvested dividends, but at that time high brokerage commissions, most people did not invest their dividends in more stocks.

Stagflation – where economic growth is stagnant while inflation becomes hot – without mercy. Researchers at the Robeco Institutional Asset Management in Rotterdam found that from 1875 to 2021, the stock lost almost 17% per year, after inflation, during the stagflation period.

The inflation rate fell sharply in 1971-1972 and again in 1975-1976 before becoming Bonkers in 1979. Economic growth was stable in 1970; it became negative in 1974 and 1975 and again in 1980 and 1982, but exceeded 4% in five years from the 1970s.

Most of the companies that turned out to be “superstocks” from the stagflation period do not seem to have the ability to increase the costs to their customers without losing business.

That is what professional investors call the pricing power – and conventional policies say that is what the company must have to prosper amid stagflation.

Of course, Altria Group, then Philip Morris Inc., has a price power: Smokers generally do not refuse to pay more than time to time for something they are addicted to.

In addition, products like tobacco and films offer consolation in difficult times. Alcohol and sugar companies have also succeeded.

However, many other stars of stagflation time tell a different story.

Microcomputer Desktop TRS-80 Tandy was one of the first personal computers to reach the market.

Between 1976 and 1982, Tandy’s revenue was about four times – not because it had price power, but because its business succeeded in a stagnant economy.

Meanwhile, House of Fabrics, which sold sewing machines, textiles, “concepts” and other cheap tchotchkes, also had little pricing but raked anyway in cash as consumers, reluctant to buy new clothes at always inclined prices, has taken the repair of old ones at home.

Today, almost all brokerage and asset management companies that search the idea that stocks with a lot of price power are the magic bullet for stagflation.

But the price you pay for the pricing power is important, a lot.

The market has sent shares like that to the moon.

History is never repeated exactly, but you are more likely to defend yourself against stagflation by buying what is cheap than by buying what is already inflated.

Real Inflation Fighter of the Stock Market May Surprise You