Stocks are an inflation hedge I was reading a good article on marketeatch and it had me thinking.
Many investors are worried about inflation but the reality is that stocks are an inflation hedge. When inflation rises so does a companies nominal earnings which expands the price to earnings ratio. However, it is offset by the increase in the cost of equity for those earnings.
The real concern is the rise in the risk free 10 or 20 year treasury bonds. The 10 year risk free rate now stands at 1.54% as of Feb 25 compared to 0.54% on Mar 9th 2020.In the last day alone, the risk free rate jumped from 1.38% to 1.54%. It is not inflation that is the issue here but it is the increase in the risk free rate of stocks which increases the cost of equity.
You might be asking why I'm talking about inflation on the Acuityads board but it's for this reason. Acuityads is not debt laced and so a rise in interest should have little impact on the cost of equity for those future earnings. We should all take the opportunity to invest more of our capital when the market shows weakness on low debt, strong capital allocators such as Acuityads. When Mr. market is pessimistic, we should take the opportunity to add to our position.