Stocks near record highs, good news, or are we approaching hyperinflation?

Recent data from Reuters says that stock markets around the globe are nearing record highs as economic data supports expectations of recovery after a COVID-19 slump.

The COVID-19 pandemic has caused reduced confidence, especially at the start of May last year, however, global stock markets have pretty much recovered, with some, such as the Nasdaq being higher than their pre coronavirus peaks.

Markets such as Euro Stoxx futures have edged up by 0.1%, meanwhile, Asia-pacific shares excluding Japan rose by 0.25%.

Shanghai shares have increased by 0.6% and MSCI estimates that global stocks will increase by 0.05%.

These predictions stem from an increase in confidence with vaccination rollout, Tomo Kinoshita says the ‘markets look ahead to economic normalisation as vaccines go around.’

Also, Asian markets have rallied with China’s recent announcement of their year on year economic growth figure, which skyrocketed to a whopping 18.3% in the first quarter of 2021.

At the same time, American markets have also rallied, the S&P rose by 1.11% and the Nasdaq Composite has increased by 1.31% in value.

This increase is due to recent announcements signalling America’s economic recovery, for example, first-time claims for unemployment benefits have crashed down to the lowest level since March 2020.

With up to 200 million Americans vaccinated, the US will see a promising economic recovery as shops and establishments open up again, thus significantly increasing the amount of payrolled employees.

An increase in payrolled employees means more people will have disposable incomes, so, they will likely spend that income.

Because of this, consumer spending increases, aggregate demand rises, and the economy grows, and with this increased confidence, stock markets will likely perform better.

Although all of this news seems quite positive, there may be an underlying issue.

First of all, how have stock markets, especially the American Nasdaq and S&P 500 higher than their pre-coronavirus peaks?

Well, it was definitely not because the economy was performing better, the unemployment rate reached 14.8% in April 2020, according to TradingEconomics.

Despite the high unemployment rate, in April, data shows that the Nasdaq was well on its way to rebounding back to its pre-coronavirus peak.

So, the question is, how on earth does an index, which is supposed to roughly measure the performance of the American economy, unable to reflect the actual issues which were going on at that time?

Well, there could be two answers for this, the first one is that the measure we are using is the Nasdaq 100, which represents the top 100, highest valued companies in the US.

And, during the pandemic, certain companies, especially tech companies such as Amazon, have benefited massively, for this reason, the Nasdaq may be filled with similar firms which also saw massive gains, thus pushing the Index upwards.

However, if this were the case, one would argue why are their airline companies on the exchange? They haven’t been performing well during the pandemic.

Thus, the reason why the American stock market is performing so well is because of one reason, and that is money printing.

Trump’s presidency was reliant on a strong and booming economy, especially the stock market, and for this reason, he would not let it go, so, the Federal Reserve began to print money.

How much money? Well, some data shows that around a fifth of the US dollars that are currently in circulation have been freshly printed during the COVID pandemic.

But how does money printing ‘fix’ the stock market?

Well, if we take into account that the US dollar is what is typically used for measuring the value of specific commodities such as gold, then we should also take into account that stock markets such as the Nasdaq and S&P 500 are also measured by the dollar.

So, when money is injected into the economy, the dollar is worthless, supply increases.

And, because of this, the value of stocks goes up as it technically costs more dollars to buy each stock.

This essentially inflates the stock market and makes it perform better than it actually is.

So, the news about stocks reaching record highs may be positive to hear on the surface, but once we examine why these stocks are so high there is one question that is likely on the mind of many, and that is, will we get hyperinflation?


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Research compiled by Jonas Theaker.


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