James Dennin, Kapitall: We decided to look for small cap stocks under 5 dollars that may benefit from just the right amount of inflation.
The S&P 500 has climbed 23% so far this year, and is poised to have its best year since 2003 assuming the current pace continues. But analysts are arguing that after a robust summer for the stock market, investors are starting to become wary as to how long the positive numbers will last.
[Read more on Small Caps from Kapitall: Deal or No Deal: Stocks Under $5 With Buy Ratings]
One of the main causes behind volatility in the markets is a deeply-rooted skepticism among investors about the utility and virtues of
quantitative easing (QE),
a debate I will try to sum up right now.
What federal banks essentially do is print money and control interest rates, with a goal to keep inflation stable and relatively low. Now, inflation is usually thought of as a bad thing. In my distant youth an apple only cost a dollar, and now it costs two. I also went to school in a frozen, one room shack – and the walk there was uphill both ways.
I might be exaggerating, but inflation is actually even more complicated than that. Because with some inflation, my debt can be easier to pay, and my liabilities go down, which means I can spend a greater portion of my assets on myself. This means that, theoretically, if you encourage just the right amount of inflation, consumers (and businesses) will be more likely to hire, expand, and spend –
people worrying that they won't be able to afford things like apples.
Now, usually the Federal Reserve controls inflation levels by raising or lowering interest rates on the debt that it issues. By doing so, they're easing or expanding the amount of capital in the market.