Is there an inflation on the stock exchange

Fear of inflation: That's why the mood on the stock market is so bad

Despite Corona, there was a lot going on on the stock exchanges recently. But now the tide is turning: the fear of inflation and rising interest rates is breaking out. What investors should know by now.

Anyone who has invested their money in stocks in the past few months had a good laugh. The prices on the international financial markets rose to new record highs. The German leading index Dax alone has increased by more than 80 percent since its low in Corona March 2020 - although the global economy is still far from being as smooth as it was before the pandemic.

What seems strange to stock market laymen at first glance had one main reason: In Frankfurt, New York, London and Co., investors literally trade the future, that is, the hope of future corporate profits, but also the expectations for the behavior of the central banks . Both of these have made investors very optimistic until the end of the day. The buying mood on the stock exchange was great, the prices rose.

But this confidence could be over for now. In the past few days, share prices fell significantly on almost all stock exchanges. While more and more people in Germany and many other countries are receiving a vaccination, an end to the pandemic seems in sight and euphoria is breaking out, the mood on the financial markets is clouding.

But why actually? And is that just a temporary phase - or do investors have to be prepared for further falling prices? t-online answers the most important questions about the current price slide.

Why are share prices falling so sharply at the moment?

The main trigger for the recent slump in prices are the reports of rising inflation. In Germany, but especially in the USA, many products have recently become much more expensive. The fear of stock market professionals and small investors: If inflation continues to rise, the central banks could be forced to take countermeasures - by raising interest rates and printing less money.

Because: Both European Central Bank (ECB) as well as the Federal Reserve Fed have the task of ensuring an annual average inflation rate of two percent. In the US, however, inflation was 4.2 percent in April, well above the 3.6 percent figure that many experts had anticipated in advance.

In the long term, so the fear of many investors, the Fed will not be able to stand idly by and watch such developments happen. The longer inflation is above 2 percent, the more likely it will be that it will withdraw support from the economy and the US government, and no longer with itPurchase of government and corporate loans ensures fresh money in the markets.

But that was exactly what fueled the stock market boom in the end: Because the many borrowed dollars and euros that the governments put into circulation to combat the corona crisis - in the USA even in the form of citizens' checks - had to go somewhere. In the absence of other high-yield investment and consumption opportunities, many small investors also invested their money in stocks, which drove prices up sharply.

If this supply of money were to fail in the future, in short, fewer investors would be able to afford the high prices for shares, demand would fall and with it the prices on the stock exchange. The second instrument, which the central banks can use to contain inflation, also works in a similar way, the key rate. If the central banks raise it, it tends to be bad for the stock market (see next section).

Why are rising interest rates bad for the stock markets?

Because, on the one hand, higher interest rates mean that it becomes more expensive for banks and their customers to borrow money. As a result, there is not so much money indirectly available in the short term as lubricating oil for the stock market engine: The demand for shares is falling, the prices are falling (see above).

On the other hand, interest rates also have a direct impact on the stock market. Because: when interest rates rise, it is not just borrowing money that becomes more expensive. Conversely, lending, saving, brings in more money. In concrete terms, this means that if you leave your money in your savings account, you can expect higher interest rates - and you no longer have to rely solely on stocks when looking for income. The result: There are no longer any alternatives for investors to equities, the demand for the securities and their prices could fall.

Do the courses keep falling?

That is the big question to which - as of now - there is no clear answer. Much depends on how inflation develops and how the central banks react to it.

In the US, Fed Chairman Jerome Powell recently heard that he would not allow inflation to rise above two percent permanently. Powell wrote in a letter to Republican Senator Rick Scott that the price increase is likely to be "a little higher" this year due to the recovery from the coronavirus pandemic. However, the Fed is not aiming for inflation to be substantially above the target of two percent, nor to exceed this mark for a long period of time.

This statement could indicate that the Fed under Powell will tighten the interest rate and monetary policy screws in the medium term, which confirmed the fears of many stock exchange traders. The Fed has not announced any concrete steps any more than has the ECB in Europe.

What does that mean for me as an investor?

That depends on whether you are already investing on a larger scale on the stock exchange - and what investment strategy you are pursuing there. If you have already invested a large part of your assets in stocks and you need this money in the short term, you could now consider selling part of your portfolio in order to protect yourself against possible price losses. Bonds from states or companies that promise higher yields than currently due to the higher interest rates are considered to be the classic alternative.

The situation is different if you pursue a long-term strategy on the stock market and possibly, as many experts advise, invest in stocks with the help of exchange-traded index funds (ETFs). If you don't need the invested money for several years or even decades, the current price slide doesn't necessarily have to concern you. Because: In the long term, based on all historical experience, it is very likely that the markets will continue to rise even if interest rates are higher, although perhaps not as rapidly as at the moment in times of very cheap money.

If, on the other hand, you do not yet own any shares, although you have been thinking about an investment on the stock exchange for a long time, there could now be good entry opportunities. Because where prices fall, stocks get cheaper. To put it bluntly, in this case you get more stock market for the same money - a worthwhile opportunity, especially if you are aiming for long-term asset accumulation.

T-online prepares all articles with journalistic care. t-online points out that the texts are not a substitute for advice and, in particular, do not constitute investment advice or a recommendation to buy or sell securities.