The stock market is up, but not enough
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Media reports of record highs in the stock market are misleading. yes, the dollar prices are higher, but the dollar values they remain below their 2021 highs.
Important: The standard analytical practice used in the inflationary period of the 1970s is discussed below. While we're not there yet, some articles have recently included the effect of inflation on price (value) comparisons.
As inflation erodes the value of the US dollar, a higher dollar in 2024 price compared to a 2021 dollar price does not mean an increase in worth. For example, if the price of milk has increased in a time of inflation, an erroneous conclusion would be that milk is now a more valuable commodity. That misinterpretation of value applies to everything measured in dollars, including stock market indices.
For value comparisons, use inflation-adjusted data.
First, here are the nominal stock indices (as reported): S&P 500, Dow Jones Industrial Average (DJIA), and Nasdaq Composite. The entire Covid period (January 2020 to March 2024) is shown.
Performance as reported
Juan Tobey
Second, add the inflation index for comparison (the CPI - all items index). Clearly, inflation is driving some of the stock market's rise, but it's difficult to determine how much from this chart.
Above graph with inflation overlay
Juan Tobey
Third, here are the "real" (inflation-adjusted) indices. This graph is the image of growth in value, similar to what is reported for real GDP. Clearly, inflation-adjusted indices remain below their 2021 monthly closing highs.
The three stock market indices, adjusted for inflation
John Tobey
The bottom line: the risk remains
Numerous articles have used the unadjusted stock moves in March and the first quarter as evidence that a new bull market is brewing. However, โrealโ indices, adjusted for inflation, are still below their 2021 highs. So that โproofโ is not here yet.
Additionally, many of those articles offer the Federal Reserve's expected interest rate cut as a key reason for stocks to rise. But that link is uncertain. Instead of stimulating growth, lower rates will likely decrease the exchange rate (that is, the value of the dollar in other currencies). Furthermore, lowering interest rates is an easy money transfer, and that means an increased risk of higher inflation.
