High Inflation Investing Equals Low PE Stocks

One of the most popular methods of valuing stocks is a price to earnings ratio or PE. Stocks that carry a high price to earnings multiple, signifying above normal growth rate expectations, are favored during low inflation periods, like the past 14 years. However, during high inflation cycles, such as the 1970’s, low PE stocks are the rage. Small Capitalization and Value stocks typify this segment during risky periods of rising prices and elevated interest rates. High borrowing rates during times of inflation hurt debt heavy (technology) equities and reward stable low debt operations.

Keep this in mind as you navigate sectors of investing focus. The Fed should eventually gain control over inflation in the next year, but we have entered a longer-term era of scarcity. Supply shortages of material and labor are here to stay over the next 15 to 20 years. Low PE will not outperform high PE in long term Bull markets, but it should be a bastion of safety with an overdue period of outperformance during difficult times like 2022.

 

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