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Will Inflation Cause a Stock Market Crash in 2022?

By Matthew Frankel, CFP®, Jason Hall, and Marc Rapport – Updated Jan 2, 2022 at 9:28PM

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Inflation isn't exactly a positive catalyst for most stocks, but just how bad could it be?

High inflation generally isn't a good thing for the stock market as a whole, but it affects different sectors in different ways. In this Fool Live video clip, recorded on Dec. 16, contributors Matt Frankel, Marc Rapport, and Jason Hall discuss how inflation could affect the stock market as we head into 2022.

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Marc Rapport: My second question is, you'd think while interest rates are going to rise, money is going to become more expensive. The market you think as a whole would be alarmed by that, but really, I think it responded pretty almost neutrally. How would you characterize those?

Matt Frankel: That's the housing market.

Marc Rapport: I like the real estate pretty much.

Matt Frankel: Sure. As far as the stock market goes, the stock market historically has produced the best returns when inflation is between 2% and 3%. This is where the Fed's 2% target comes from in a lot of ways. If inflation is too low, it generally means there's something wrong with the economy. If inflation is too high, like you said, it can halt economic activity. The market doesn't produce negative returns, it just doesn't outperform its historical averages during high-inflation times. But there's a sector-by-sector thing. You mentioned real estate.

Jason Hall: There's a correlation, too. A lot of times there's high inflation periods where we're followed by recession or slowed economic growth. When the economy is not growing as well [as before], businesses don't grow their profits, their stock prices don't go up as much. That's essentially just the way it works.

Matt Frankel: It's a sector-by-sector thing. Mark mentioned real estate a minute ago. Home prices historically are generally boring to track. Not so much in the last year or so, but historically, home prices keep up with inflation pretty much one-for-one. Same with rent. Real estate stocks tend to do pretty well during inflationary times. We'll talk about some specific names that Jason and I like in a second. The financial sector is another one. They won't even tend to do OK; they tend to do really well because inflation and the rising interest rates means that they make more money. If a bank can charge you 7% on an auto loan versus 4%, they're going to make a lot more money. It could actually be good for banks and other financial sector companies.

Utilities have pricing power. That's another one they do well in inflationary times. Any other company that has really strong pricing power. I always mention Apple (AAPL -0.91%) as a good example in the tech industry just because they have the ability to raise their prices with inflation, and people will still buy their products just as much as they are today. As long as there's not a deep global recession, someone would pay a $100 more for the newest iPhone.

Jason Hall has no position in any of the stocks mentioned. Marc Rapport has no position in any of the stocks mentioned. Matthew Frankel, CFP® owns Apple and has the following options: short January 2022 $140 calls on Apple and short November 2021 $140 calls on Apple. The Motley Fool owns and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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