Despite media reports of record high stock market values, the reality is that the dollar values are still below their peaks in 2021. This is due to the impact of inflation on the purchasing power of the dollar, which has eroded its value over time. Therefore, a higher dollar price does not necessarily indicate an increase in value, as inflation must be taken into account for accurate comparisons.
In order to make accurate value comparisons, it is essential to use inflation-adjusted data. By incorporating the inflation index (CPI – All Items index) into the analysis of stock market indexes such as the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, the impact of inflation on the stock market rise can be better understood. It is evident that inflation is playing a significant role in the current market trends, although the exact extent of its influence is difficult to determine.
When looking at the “real” (inflation-adjusted) indexes, it becomes apparent that the growth in value is not as significant as the nominal indexes suggest. Despite the unadjusted stock market moves indicating a new bull market, the inflation-adjusted indexes remain below their 2021 highs. This suggests that the recent market improvements may not be as substantial as they appear on the surface.
Many articles have attributed the recent stock market gains to the Federal Reserve’s expected cut in interest rates. However, the link between interest rates and stock market performance is uncertain, and lower rates may actually lead to a decrease in the value of the dollar against other currencies. Additionally, lowering interest rates can increase the risk of higher inflation, as it is essentially an injection of easy money into the economy.
In conclusion, it is important to consider the impact of inflation when analyzing stock market performance. The current rise in stock prices may be inflated by factors such as inflation and interest rate cuts, rather than genuine value growth. While some may see the recent market trends as indicators of a new bull market, the reality is that the true value of stocks, when adjusted for inflation, is still below their previous highs. The ongoing risk of higher inflation and uncertain market conditions suggest that caution is warranted when interpreting the current stock market data.
