Rising stock prices do not mean improving economy | TheUnion.com

Rising stock prices do not mean improving economy

What is real return?

Take the stock market for instance. Most people think a rising stock market is a sign things are improving and indeed, the Federal Reserve has said it wants a rising stock market and cites a rising market as proof there is a recovery materializing.

The stock market is indeed reaching new highs. The thinking goes is that the more money that is in investor’s stock accounts will cause people to feel better about their financial situation (called the wealth effect), and in turn they will then spend more.

It all sounds good but let’s look at this within the scope of reality.

Stock prices can indeed go up in an economic recovery because an improving economy will help business bottom lines. More people working means more money in people’s pockets and that means they can buy more stuff. This higher level of consumer demand in turn means more profit for business which drives stock prices higher.

But stocks can also rise solely because of inflation.

Just like the price of a Starbucks coffee or an egg will go up with inflation, so will stock prices rise.

One only needs to look at the Zimbabwe stock market for proof of that one.

The Zimbabwe stock market went up by 12,000 percent in one year a few years back yet its economy was a mess.

The Zimbabwean market in this case was not reflecting a healthy economy but a very sick one. Stocks there were only rising because inflation was so bad, anyone holding Zimbabwe dollars was losing purchasing value at an astonishing rate, wiping out saving values in literally days. This threat forced investors out of the Zimbabwe currency and into one of the only places they could go to protect themselves and that meant into stocks. With trillions of paper dollars then flowing into stocks, the markets soared.

Owning stocks was one of the few things Zimbabwe citizens could do to at least offset some of the effects of their terrible inflation.

Zimbabwe experienced terrible inflation because their central bank did what we are now doing: print money by the truckload to pay their bills. Although the Zimbabwe stock market looked on the surface to be skyrocketing, the reason it was doing so was anything but healthy.

The lesson to be learned here is that before one correlates higher stock prices with an improving economy, you have to first look to see if massive money printing is taking place in the country whose market is rising.

If it is, stock prices are probably not reflecting a healthier economy but instead the fact that the underlying currency supporting that market is weakening.

In the case of the U.S., massive money printing is indeed underway and has been for quite some time. As the U.S. dollar continues to lose value because of its over issuance, much of that money is finding its way into the stock market.

The proof as to whether our rising market means our economy is really improving is to see what will happen when the FEDS put a stop to the printing presses.

This article expresses the opinions of Marc Cuniberti. He hosts “Money Matters” on KVMR FM 89.5 and 105.1 FM on Thursdays at noon. He has been featured on NBC and ABC television and on a host of made for TV documentaries for his economic insights. His website is http://www.moneymanagementradio.com.

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