Sticker Shock 2021: What Does Inflation Do to the Stock Market?

Sticker shock is going to be a serious problem in 2021 as investors worry about the effects inflation will have on the stock market this year.

Coin stock with red arrow representing inflation.

Source: Anton Watman/Shutterstock.com

So what does inflation do to the stock market? About the same thing it does to everything else. It reduces purchasing power as the dollar doesn’t stretch as far as it previously did. However, there are other effects to consider.

For example, investors looking for stocks that generate income through dividends are likely going to turn bearish with rising inflation. That’s due to the dividends paid out by companies not being able to keep up with inflation rates.

So what does this mean for these stocks? Typically, they see their value decline as investors deem them not worthy of buying due to inflation outpacing dividend payments. However, it is worth pointing out that those dividends can act as a partial hedge against rising inflation rates.

Of course, that doesn’t mean there aren’t investment opportunities to be found among income-generating stocks right now. Investors can keep an eye on these stocks as they decline and buy them on the dip. Then they profit as inflation tapers off and the stocks gain value again.

That last bit is worth pointing out as the sticker shock from inflation isn’t expected to last beyond 2021. The Federal Reserve is expecting inflation to rise this year before slowing down the following year. However, there are concerns that inflation will keep rising and policymakers will have to put a stop to it, reports Investor’s Business Daily.

Investors that want to see what else is happening with the market today can keep on reading.

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On the date of publication, William White did not have (either directly or indirectly) any positions in the securities mentioned in this article.


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