I’ve mused out loud to friends that the recent run-up of the stock market was not based on confidence in the economy or the individual companies, but rather an expression of the value of a dollar. It’s fairly simple: investors see the currency losing value over time (due to gov’t spending), and so convert their currency into assets. It’s basically like buying gold, i.e., an inflation hedge.
By my theory, the fundamentals of the stock market haven’t changed – the companies’ prospects haven’t improved dramatically – but it now takes more dollars to buy the same amount of stock. The “rising” market is anticipating inflation, not recovery.
But since I hadn’t heard any smart people saying such a thing, I figured there wasn’t much to my theory. But, cue horn-tooting, the WSJ’s numbers seems to support it: “Adjusted for Inflation, Dow's Gains Are Puny”.
How much of the market’s recent 20% gain is simply a precursor of (real) inflation?