What soaring inflation means for the stockmarket


Not surprisingly, the RBA raised the official interest rate again this week by another 0.25% in an attempt to curb inflation making this the ninth consecutive rise.

While we have seen interest rates at this level before, it has been quite some time. But the good news is that around half the time that the rates have been rising, the Australian stock market has risen well over 10%. So, to what degree does inflation impact the stock market.

We know inflation affects interest rates as the RBA continues to use this tool to either stimulate or slow the economy. But inflation also impacts the stock market in a positive way, as a moderate level of inflation can be a sign of a growing economy, increased consumer spending, and rising corporate profits.

asx top shares this week

However, as we have experienced in the past year, if inflation exceeds the RBA's preferred target it can lead to increased interest rates to slow economic growth.

But here is the twist: while we want growth, as this leads to greater profits and, in turn, rising stock prices, continually increasing interest rates can do the opposite. If profits drop, dividends may fall, therefore, if the RBA continues to raise interest rates, investors may move out of the stock market into other assets, such as cash, to gain a better income yield.

In an inflationary economy, some stocks will be more affected by rate rises while other companies will benefit. Industries such as energy, materials, and consumer goods can be more susceptible to changes in interest rates especially rising interest rates.

Banks, on the other hand, tend to benefit, as they are slow to pass on the savings when interest rates fall but very quick to pass on rate rises, therefore, creating more profit for themselves.

The good news is that I believe we are nearing the end of rising inflation and rate rises, with it likely to end in the new few months.

The best and worst performing sectors this week

The best-performing sectors include Energy up more than 1% followed by Materials and Financials, which are just in the green. The worst performing sectors include Healthcare down more than 3% followed by Consumer Staples and Information Technology, which are both down more than 2%.

The best performing stocks in the ASX top 100 include Newcrest Mining up more than 12% followed by Medibank Private up more than 5% and Suncorp up more than 3%. The worst performing stocks include Sonic Healthcare and ARB Corporation, as they both down more than 9% while Wisetech Global and AGL are down more than 7%.

What's next for the Australian stock market

The All Ordinaries Index looks set to close lower for the week and if it falls away on Friday below 7674 points, it will confirm its first week down for the year. As I have said in previous reports, the Australian market has been very bullish this year, so the likelihood of a fall over one to two weeks is high.

If the market has made a peak, it may fall to around 7500 points or below. If the fall is short in both time and price, then it's likely the market will turn to rise sharply and push through the previous all-time high to the next high sometime in March.

That said, I am mindful that the fall may be more sustained, which means we could see a fall over several weeks to between 7500 points and 7200 points. If this occurs, there will be many great buying opportunities in our market. Either way, now is not the time to be complacent, instead you should be preparing to set up your portfolio for the rest of the year.

In the short term, I expect the Consumer Discretionary and Materials sectors to ease off and the Financial sector to be flat but there is likely to be some great opportunities in Energy and Information Technology.

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Dale Gillham is chief investment analyst at Wealth Within Limited (AFSL 226347). He also serves as the head trainer at the Wealth Within Institute (RTO 21917). He has more than three decades of experience in the investment industry, and is the author of How to Beat the Managed Funds by 20%, Dale's qualifications include an Advanced Diploma and a Diploma of Share Trading and Investment. He co-hosts the Talking Wealth Podcast, and his work has appeared in The Australian Financial Review, New York Business Journal, Wall Street Select and more.