Will Rising Inflation see the Stock Market Crash?

With the Australian stock market falling over the last few weeks, there has been a lot of talk about consumer confidence and rising inflation as the possible causes. With the RBA set to meet for the first time this week, the focus is on whether they will raise interest rates and how this will affect the stock market.

Australia’s inflation rate at the highest level since 2008

According to the RBA, inflation is currently sitting at 3.5 per cent. To put this into perspective, at the start of this century inflation was 1.8 per cent and was as high as 5 per cent in September 2008 and as low as -0.3 percent in June 2020. According to Trading Economics, the Australian inflation rate has averaged 4.86 per cent from 1951 to 2021, yet we are now at the highest level of inflation in the last 13 years since 2008. Consequently, many are talking about raising interest rates to slow the economy and curb inflation.

Right now, given the current COVID situation, I do not think there is a solid argument for raising interest rates although I do believe they will rise this year. That said, I don’t believe the rise will be anything significant, as the RBA knows that the current factors driving up inflation are only temporary.

Regardless of your views on whether interest rates will rise, the fact is that the market is falling. So, understanding why should be of least importance; what you need to focus on is whether to hold your position in the market, reduce it or exit altogether.

In my opinion, investors are too focussed on what the index is or will do rather than focussing on their investments. Right now, I am not focusing my attention on the market or interest rates but instead on some of the top 50 stocks in our market, as I believe they will present some great buying opportunities in the next few weeks.

What were the best and worst performing sectors last week?

Once again, all of the sectors in the Australian stock market were down with the best performer being Consumer Staples down 0.04 per cent followed by Utilities down 0.51 per cent and Energy down 1.77 per cent. The worst performing sectors included Information Technology down 8.04 per cent followed by Materials down 3.46 per cent and Healthcare down 3.05 per cent.

The best performers in the S&P/ASX top 100 stocks included Rio Tinto up 4.64 per cent followed by AusNet Services up 3.19 per cent and Coles up 2.42 per cent. The worst performing stocks included Evolution Mining down 16.06 per cent followed by Mineral Resources down 15.81 per cent and Wisetech Global down 15.35 per cent.

What's next for the Australian share market? 

Since achieving a new all-time high of 7,926 points on 5 January, the All Ordinaries Index has fallen over 11 per cent to a low last Thursday of 7,031, which is very close to my target level. As I have mentioned previously, given that our market hasn’t experienced a major fall since the COVID crash in March 2020, it was possible that it would fall below 7,000 points and this is looking very likely.

I now believe we have seen the majority of the fall in price and while the down move may last another few weeks, the All Ordinaries Index is unlikely to fall much below 6,800 points. Many investors are worried about the market right now, so I want to be clear that I do not believe it will crash this year. That said, as always, I urge investors to protect their capital in case it falls further.

Once the low is confirmed, I believe our market will have a very nice run up this year and continue in a longer term uptrend until the middle of this decade.

For now, good luck and good trading. 

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.