Investing Trends

WITH rising prices running higher than it was a twelvemonth ago, investors are faced with a host of uncertainties. First and foremost, is rising prices bad for stocks?

The simple reply is, not necessarily.

To be sure, rising terms devalues corporate earnings, a major driver of stock prices. But the mere presence of rising prices also proposes that many companies are successfully passing along terms additions to customers, said Alan F. Skrainka, main marketplace strategian at Prince Edward Jones, the brokerage house firm based in St. Louis. And that’s good for profits.

Moreover, while time periods of high rising prices typically cut down stock returns, they have got been much harder on bonds. In the 23 calendar old age between 1926 and 2007 when rising terms measured more than than 4 percent, pillory returned 6.9 percentage on average, versus just 2.8 percentage for long-term government bonds, according to Ibbotson Associates.

A separate analysis by , meanwhile, establish that in inflationary time periods — as measured from troughs to extrema — going dorsum to August 1972, some 6 of the 10 marketplace sectors in the Standard & Poor’s 500-stock index actually gained ground, on average.

This explicates why pillory — even though they’re ache by rising prices in the short term — May be an investor’s best long-term hedge against inflation.

Of course, this isn’t to state that high rising prices is welcome. The mere fact that rising prices can cut into returns, sometimes significantly so, is enough for investors to be worried.

So stock investors may desire to see respective factors in the approaching hebdomads and months:

THE 4 percentage threshold Is rising prices running at 4 percentage or more? “That looks to be the line in the sand,” said Surface-To-Air Missile Stovall, main investing strategian at Standard & Poor’s Equity Research.

Mr. Stovall studied past time periods of rising prices going back to 1960, using the overall — Oregon “headline” — Consumer Price Index as a gauge. He establish that when the C.P.I. was rising at no more than than a 4 percentage yearly pace, the S.& P. Five Hundred gained about 1 percentage a month, on average.

But when the terms index grew 4 to 6 percentage annually, pillory lost an norm of 0.3 percentage a month. Pillory fared even worse at higher rates of inflation.

According to the Labor Department’s most recent appraisal of consumer prices, based on April data, the terms index was growing at a 3.9 percentage clip. That’s just under the 4 percentage threshold and still within what Mr. Stovall names the sweet topographic point for inflation: the 2 to 4 percentage range.

A substance OF direction Which manner is rising prices headed? “There’s A large difference in the degree of rising prices and the way of inflation,” said Jeffrey N. Kleintop, main marketplace strategian for LPL Financial in Boston. For example, when rising prices is painfully high but falling, pillory can make quite well, Mr. Kleintop said.

In 1980, the Consumer Price Index rose by more than than than 12 percent, but pillory still gained more than 32 percent, according to Ibbotson Associates. Why? Perhaps because in 1979, rising prices was even higher, at more than than 13 percent.

And while the norm charge per unit of rising prices throughout the 1980s was an uncomfortable 5.6 percent, it still turned out to be a great decennary for stocks: the S.& P. Five Hundred rose by an norm of 12.6 percentage a year. The cardinal may have got been that rising prices was declining throughout the decade.

In time periods of low-but-rising inflation, pillory can experience a pinch. Ned Davys Research of Venice, Fla., recently studied the public presentation of pillory between the first one-fourth of 1926 and the first one-fourth of 2008. In time periods when rising prices accelerated, pillory gained less than 0.5 percentage a year, on average, Ned Davys found.

By comparison, in time periods when the rising terms charge per unit fell, pillory soared by an norm of nearly 10 percent.

THE core rate Type A large ailment these years is that economic experts don’t understand how painful rising prices is to the norm family, because they be given to concentrate on core inflation, which deprives out the volatile prices of nutrient and energy.

But in measurement the macro instruction economy, said Mr. Skrainka at Prince Edward Jones, core rising prices is a “better index of long-term trends because it states us if higher energy and nutrient costs are feeding through to the remainder of the economy.”

Investors also necessitate to pay attending to core rising prices because the does. And “if rising prices pressure levels stay high or rise to the point where the Federal is forced to raise involvement rates, then you’ll see a direct negative impact on stocks,” said Jesse James B. Stack, editor of the InvesTech Market Analyst, a newsletter.

There’s another ground to be aware of core inflation.

“There’s A perfect reciprocal relationship” between core rising prices and stock marketplace valuations, said Liz Ann Sonders, main investing strategian at .

Ms. Sonders have discovered that since 1960, whenever core rising prices have hovered between 2 and 3 percent, the norm price-to-earnings ratio of the S.& P. Five Hundred have been 19.7, based on trailing 12-month earnings. But when core rising prices leaps to between 4 and 5 percent, the norm P/E falls to 14.8.

Where is core rising prices now? The authorities states it’s running at an yearly gait of about 2.3 percent. That’s the good news — at least so far.

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.