“Demonstrate how changes in MS, inflation & int rates influence stock & bond prices” Bonds I understand… very intuitive For stocks, inflation is generally inversely related to returns (higher infl, lower returns) unless they can pass along through price increases. Does this mean stock returns are also inversely related to the money supply and int rate levels? It makes sense they would because (k-g) goes up w/higher int rates and/or infl… however, my notes suck & I don’t have the CFA book handy. Any color appreciated. thx
I will have to check my notes on this one, but I seem to recall there not being a clear-cut answer. I think that there has been some positive correlation between MS and stock returns but the results were not very definitive. As for interest rates…your guess is as good as mine. Best, TheChad
Inflation goes up, production costs increase. If the company can increase prices, stock prices increase in line with inflation. If the company cannot pass on the increase to customers, k-g increases and stock prices decline.
If interest rates go down, money supply goes up, financing becomes cheaper, investment increases (LM shifts along IS curve), output increases (in the short run) Then prices go up (inflation goes up), LM shifts back, investments go down to previous equilibrium level (in the long run) I guess stocks should go up due to cheaper financing.
From what I recall, bonds do poorly in an inflationary environment because you receive fixed payments though everything gets pricier. Stocks fair a little better because they are able to push some of the cost to the consumer (not all though, unless its a monopoly). Cash is better to hold than the two in this environment (someone, please confirm if that seems right).
agree with you mp2438
thx. Consensus seems to be stocks are negatively related to increase in MS and int rates
Neveruse_95%_everagain Wrote: ------------------------------------------------------- > thx. Consensus seems to be stocks are negatively > related to increase in MS and int rates I disagree. As the money supply increases, the economy generally expands. As the economy expands, stock returns increase
^ initially, when rates are cut, money supply increases and more money is put into investments (stocks). But then inflation starts to kick in, growth quickly slows because of the reasons noted above (namely, companies can’t pass on their increasing input costs to the consumer).
Stock performance is in line with economic growth. Low and moderate inflation is normal during an economic expansion. High inflation will slow down the economy and hurt stocks. So also pay attention to the Q about the trend as well as the level of inflation.
Neveruse- An increase in MS is expansionary. An increase in Interest rate is contractionary. Increase in MS should lead to inflation. Mild inflation and if producers can pass the cost to consumers- then inflation would lead to growth and thus stocks will benefit
Neveruse- An increase in MS is expansionary. An increase in Interest rate is contractionary. Increase in MS should lead to inflation. Mild inflation and if producers can pass the cost to consumers- then inflation would lead to growth and thus stocks will benefit
This is a shot in the dark, but it could be a short term vs long term effect. Money Supply might expand first, stocks will rise since financing is cheaper. This might be early expansion. Later- as economy heats up, inflation kicks in and then it depends on whether or not producer can pass inflation on to consumers.
^ bingo.
Still discussing this?! I forgot I even asked the question… anyway, I agree for stocks that it’s related to it’s ability to pass along inflation. mp2438, your comment about stocks vs. bonds vs. cash sounds familiar… where was that in the reading? I couldn’t find it.
Reading 24.