Stock Price and Inflation

[marko]

Another slow day at the marko household. Musing.

This is a theoretical question, so I hope we don't get bogged down in minutiae.

You need about $64 now to buy what cost $20 back in 1980. All things being equal (again, theoretically) would that imply that the NAV of an equity would somewhat keep up with inflation even if everything with that company remained stable?

I'm wondering how much a company's NAV is impacted by their internal actions (likely most of it) vs how much inflation drives a bit of it. So, could a stock that cost $20 in 1980 be worth ~$64 through simply letting rising inflation push it along?

 

[corn18]

Another slow day at the marko household. Musing.

This is a theoretical question, so I hope we don't get bogged down in minutiae.

You need about $64 now to buy what cost $20 back in 1980. All things being equal (again, theoretically) would that imply that the NAV of an equity would somewhat keep up with inflation even if everything with that company remained stable?

I'm wondering how much a company's NAV is impacted by their internal actions (likely most of it) vs how much inflation drives a bit of it. So, could a stock that cost $20 in 1980 be worth ~$64 through simply letting rising inflation push it along?

Inflation impacts the cost of debt. Debt can drive growth in a company. Therefore, inflation = lower growth. Lower growth = less stock appreciation. All else being equal.

 

[pb4uski]

If it were an investment that didn't pay any regular dividends or interest, like a non-dividend paying stock or a zero coupon bond, then your idea might be valid... a $20 investment in 1980 would need to be worth $64 today for it to have kept pace with inflation.

But real life is more complicated and non-dividend stocks and zero coupon bonds are not common investments on a large scale.

A company's profits might pace with inflation... even with no volume growth if price were adjusted for inflation and costs increased with inflation... but changes in technology, substitute products and increases in productivity would disturb that equation.

The more I think about this and your hypothesis, the more I realize that it must be a REALLY slow day in markoland!

 

[marko]

The more I think about this and your hypothesis, the more I realize that it must be a REALLY slow day in markoland!

Some days are better than others, fersure!

 

[njhowie]

I'm wondering how much a company's NAV is impacted by their internal actions (likely most of it) vs how much inflation drives a bit of it. So, could a stock that cost $20 in 1980 be worth ~$64 through simply letting rising inflation push it along?

When we talk about stocks, NAV (book value) is pretty irrelevant as far as correlation to stock price.

 

[marko]

When we talk about stocks, NAV (book value) is pretty irrelevant as far as correlation to stock price.

Sorry. I meant stock price. I tend to use them interchangeably.

 

[audreyh1]

In this case I think OP means NAV = stock price. Just like it is used to compute the NAV of a mutual fund.

 

[twaddle]

In theory, the main driver for stock price is earnings growth. So if earnings increased at the same rate as inflation, then so would the stock price. In general, companies do increase prices with inflation (pretty much the definition of inflation), so revenue does track inflation.

A slightly more nuanced model includes P/E expansion or compression and dividends.

See John Bogle's "expected return" formula, for example.