Stock Market Going Up Because of Increasing Inflation?

[Gilberto de Piento]

Over the last week or two I have twice heard a caller (it could be the same caller twice) on a podcast say that the stock market is going up because wall street is expecting inflation. I assumed the market was going up because wall street tends to be conservative and is excited about Trump/Republican policies they expect to happen soon.

Is the market actually going up more (it has been going up since 2009) since the change in power? Why is the market going up?

Should we expect inflation? If so, does this change anything for investment or FI strategies?

[Farm_or]

My take is that the speculators are expecting the same dollars cut from corporate tax to add to earnings. Not going to happen. The border tax to replace the cut already has opposition. The results of implementation could react in reducing trade.

Bottom line, the tax cuts will result in .$0.10/dollar increase in earnings?

[Fish]

I've been wondering how the inflation of the money supply will affect the stock market. The mental model I'm operating with is kind of like this:
https://www.peakprosperity.com/blog/104 ... hsidelines

And so I've been wondering how equities have been keeping pace with the money supply assuming the simple binary model in the above post. I don't think you're asking it from this perspective so I won't embed the chart (it'd be a distraction):
http://imgur.com/VvfveYW

Probably you were asking from the perspective of the velocity of money increasing, producing inflation that is reflected in increased consumer prices and therefore corporate earnings? That would provide another mechanism to support higher stock prices if P/E is going to remain more or less where it is. Question is, how are all the market participants making their decision whether to hold stocks and at what price?

[IlliniDave]

Well increased inflation may be part of the dynamic, back to the whole raising of interest rates/falling of bond prices which might make stocks more attractive to some. My gut is that it is more related to the anticipation of significantly lowered corporate taxes and to an extent some relaxing of regulations, both of which set the stage for a short-term bump in corporate profits. Many hope in the longer term it will make the US a more attractive place to do business overall which could lead to some additional growth. All that is in the realm of speculation, of course.

In the end the prices go up when the demand increases. There's not always a clear cause-effect reason.

[Lucky C]

Based on this source below, if you look at all the nine largest bull markets in US history, inflation only contributes about 20% (rough estimate) to total returns. The biggest contributors to bull markets are usually changes in valuation or dividend yields. The biggest role inflation has played was in the 1974-1987 bull market when the average inflation over that period was around 8%, and still its contribution to total returns was less than 40%.

https://blog.thinknewfound.com/2017/02/ ... ll-market/

Inflation has been low and has been a small contribution to this bull market thus far. It seems to me like it would take (an expectation of) a very rapid spike in inflation to cause it to be the main driver of recent gains. So it's possible, but how likely? Otherwise, since earnings and dividends have not been so great, it looks like the main contribution to the continuing bull market is that valuations are continuing to expand beyond historical norms.

[Sclass]

This is a really interesting question. I've never really gotten my mind around what inflation really is. Or if I actually know it when I see it. I'm going to think out loud here so feel free to skip this or step out for popcorn. I'll say up front I don't know the answer.

I started investing during the late nineties stock runup. I was told by a blue chip investor that tech people were printing money on their inkjets in the form of stock certificates and "causing inflation". Living in Palo Alto at the time it looked like 1929. People were throwing money and stock around like crazy. Landlords were asking for certificates instead of cash for deposits on rentals for prime office space in downtown. Pure mania. And stuff got expensive...everything from tequila at the bar, parking spaces and BMWs went up. I actually had a coworker who drove to LA every weekend, bought a used BMW cash, then sold it before Wednesday in San Jose for a $2k profit...like a clock. Till it all ended.

Oddly, "inflation" was low at the time.

At the time I realized I didn't have a solid idea of what inflation was. Guys were selling their stock and buying homes. Bay Area housing was on a tear. I said it looked like inflation. I got shouted down by all the new homeowners at work. "Asset Appreciation" I was corrected.

So I started to think up my own definition of inflation which was too much currency chasing too little asset (or currency for that matter). Whether it is new IT hires or tulips, the price goes up when there isn't enough to meet the cash.

So yeah, the stock market is frothy. The businesses I own shares in look an awful lot like they did before the election. I think a lot of financially conservative folks have taken their cash and gone to the races recently.

The new administration looks like it has the potential to change fundamentals for better or worse. So I'd say yeah, too much money chasing too few issues (where are all the IPOs?).

But that prolly isn't what you're asking. Maybe it's the low interest financing that has allowed CEOs to borrow money to buy back stock? This kind of activity eventually runs out of steam and will be a wash as far as long term growth goes. The real economy has come back from the dead and they don't need to use this kind of "juice" as much now.

Funny how we aren't supposed to be having much inflation. My monthly expenses seem to rise every year. I guess I'm living better these days. Cars seem cheaper even though I drive a thirty year old car. Car parts are certainly cheaper in real dollar values. Electronics are dirt cheap (bought a new Alcatel android 5 phone yesterday for $25 to use as a security camera monitor). Fuel is sinfully cheap. Food is cheap...especially the big ag trash at the local supermarket. But I feel like I have less for more.

Funny. Even as my investments get the Trump bump I feel like I have less maybe, maybe because my peers are also piling on paper gains so easily. Somehow we have decoupled the work and storage of energy from the currency. I mean, most of my friends don't work, they make money off the markets. Their pile of paper goes up when the demand for stock increases while people who actually work Force x Displacement have salaries that go sideways. Somehow by getting past all that we've decoupled ourselves from value so to speak.

Half of this is in the mind. Or the collective mind. Cars seem cheap. Wow, I looked at a Civic yesterday. That's a lot of car compared to the Civics I looked at in 1998. Young people get a superior car for the same dollar price I was asked to pay when I was young. But it doesn't feel like a deal when everyone else around you stuck in traffic on the 5 has a new Civic. Inflation so to speak. But of the asset not the currency. Too much car value and not enough cash to buy it.

Maybe we will find out just how much our little scraps of paper are worth soon. I dunno. Aww s..t, look at all that diarrhea ramble! I need to get out of bed.

[EdithKeeler]

From an ERE/FI perspective, I'm not all that worried about inflation. It doesn't matter much to me if house prices go up--I already own my house(s). Sure, taxes, insurance, repairs could go up, but in the grand scheme, that seems pretty negligible. I'll probably need a new car in a couple of years, and it may be more expensive than a similar car now--maybe $5K or $10K more? but again, in the grand scheme (for a car I'll drive 10+ years), again, it seems negligible. Same with gas.

Unless we get to the kind of inflation where people are taking wheelbarrows full of bills to pay for bread, I don't think that someone who's got good ERE systems in place is going to much affected. If groceries get too pricey, we'll eat more beans and rice. If gas goes crazy high, we'll ride our bikes more. It might be tricky if you choose to rent, but goodness knows we frugal types are resilient and likely to figure out something.

Perhaps I'm naive, but I don't worry too much about inflation in my planning.