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Inflation fears have dominated the conversation in the world of investing throughout much of 2021. A loose fiscal policy from the Federal Reserve, coupled with rising wages and ballooning costs for consumer goods, has the US in the middle of fast-moving inflation. As the value of the dollar goes down, investors fear that the near future could see profit margins for the largest earners taking a nosedive.
While this news is terrible for big businesses and investors who hold shares of those companies, it’s a less urgent concern for the average US worker. After all, if wages are rising to compensate for the devaluation, then things won’t feel very different for the average person.
The question that remains for investors, however, is this: How bad will things get for the stock market?
The main effect inflation has on stocks is that it cuts into profit margins. Since businesses often need to pay their employees more as inflation rises, the cost of goods naturally increases, too. However, rising costs can lead to decreased sales. So, with higher expenses and potentially depressed sales numbers, companies will naturally see their margins getting thinner as inflation intensifies.
This can play havoc with shares of publicly traded companies. Stock shares comprise a large portion of many investors’ portfolios. A downturn in profits is almost always followed by shrinking share prices.
There are a few ways to try to shore up your portfolio against inflation losses. One of the most well-known ways to do this is to invest in gold. Gold enthusiasts insist that the precious metal is a safe investment against inflation. Historically, gold has preserved its value well even as the value of government-backed currency has struggled.
A new option for those looking to hedge against falling stock prices could be Bitcoin. The volatile cryptocurrency is famously hard to predict, but its most vocal supporters claim that it could be the future of currency.
There’s another possibility for the market, though. It’s possible that the Federal Reserve could ease inflationary pressure. Should the Fed taper off its current fiscal policy and return to pre-2020 interest rates, inflation could theoretically return to the slower pace from the past decade.
This would require some other factors to fall into place first, though. For one thing, the price of consumer goods has skyrocketed, thanks in large part to the bottlenecks in the shipping industry and the shortage of microchips in the tech world. Should these bottlenecks ease off by next year, however, inflation could slow down, potentially boosting shares and returning the stock market to its 2019 highs.
For investors, this is a tough prediction to make. There are so many variables at play that some analysts are simply recommending that investors diversify their portfolios and hope for the best.
