Is inflation in favor of the stock market?
According to Tejarat News, the good days of the stockbrokers did not continue in the first half of 1999, and the shareholders, who witnessed a 300% growth of the total index in less than 5 months, have been suffering from an erosive decline for 16 months now. Fluctuations that some have linked to inflation and others to interest rate manipulation.
Three inflation scenarios affecting the stock market can be enumerated; Inflation with interest rate manipulation, inflation without interest rate manipulation and inflation control. The first two scenarios may have few winners in the stock market; But the losers in both scenarios will be micro-shareholders.
In the third scenario, both the general shareholders and the national economy will win. A review of global experience also shows that the steady boom recorded in the most important stock exchanges occurred when inflation was curbed in the single-digit channel. In this scenario, the boom in the real sector of the economy begins with the reduction of volatility and investments are improved so that its reflection in the growth of real profits of companies, leads to the recording of brilliant performances in the markets.
Is inflation in favor of the stock market?
Perhaps the good memories of the stock market in the first half of ’99 will never be forgotten. Where in less than 5 months the weighted average stock price rose more than 300% and some stocks in this 92 day period even made 700% profit of those shareholders. In this cut, many once thought that the growth of the stock market was the product of inflation. With the reversal of stock prices and the beginning of the fall, however, the system of stakeholders to the stock exchanges proved that the main reason for the stock fluctuations in the spring of 1999 was not the increase in inflation but the decrease in interest rates.
But what does inflation do with the stock market, and what does controlling inflation create for this market? Is reducing inflation the enemy of the stock market? Questions that many stock exchanges may ask themselves, and since they can not find an exact answer, they are afraid of the possibility of lowering inflation expectations when they receive any signal, and they throw water and fire so that they can convert their stocks into cash and go to the market. Not to be threatened if inflation decreases.
But are the stock market and rising inflation really directly related? A review of global experience in this regard shows that the steady growth and prosperity recorded in the most important global stock exchanges was not inflation at all, but occurred when inflation was contained in the single-digit channel and below 50 percent. Under these circumstances, the real sector of the economy begins to move due to the reduction of volatility and investments also improve, so that its reflection in the increase of real profits of companies leads to the recording of brilliant performances in the record of these markets.
What is inflation?
More or less everyone has heard of inflation and its meaning in life with flesh and blood. Decreasing purchasing power, devaluing the country’s currency, increasing the prices of goods and services, and many others are all effects of inflation. From the perspective of economics, inflation is the increase in the general level of prices over a period of time.
Inflation is a change in a price index and is usually considered a consumer price index. The consumer price index is also a measure of the average weight of a basket of goods and services such as food, transportation, health, and که used to calculate inflation.
The central bank of each country determines the basket of goods and calculates the annual inflation based on the price changes of this basket. According to the latest statistics, the annual inflation rate in November 1400 for the country’s households reached 44.4%, which is a decrease of 1% compared to the previous month.
Winners of inflation growth exchange?
In total, two general scenarios can be considered for increasing the inflation rate; In the first case, the country will see policy manipulation in interest rates as inflation rises. In this case, a small group, with access to banking resources, buys the swollen stock with cheap loans and adds it to their portfolio, and sells it at a high price at the beginning of the stock price bubble; Because they are aware of the direction of the money allocated to the market – for support – and they themselves are influential in moving it in the desired direction.
A simple review shows that all the money that went to support the stock market after the bursting of the bubble in the spring of ’99 became a special stock that probably played the most important role in directing the overall index. As a result, the price bubble of these stocks emptied with a delay compared to other stocks.
Thus, rising inflation while manipulating interest rates has only a limited number of beneficiaries who have access to cheap bank loans, confidential information, and supportive money that maximize their profits with the human shield of some affected shareholders. The second case, however, occurs when interest rates are not manipulated despite rising inflation. Inflation that can be boldly said does not benefit any group. Because in such periods, keeping chickpeas may seem like a good investment, but the fact is that along with the increase in the value of the stock market, the prices of consumer goods and costs are also rising.
In such a situation, depositing in banks may also be a good return for those investors, because interest rates have been allowed to reach equilibrium levels in line with rising inflation. In such inflation, only professional oscillators who know what path inflation will take and what will be its escape and decline according to the government’s economic policies can increase their profit from stock trading. But the general public can not benefit from these inflationary conditions. Therefore, it can be concluded that increasing inflation in any way can not benefit the stock market and its shareholders in general.
Do scholarships like inflation?
Will we see a booming stock market when inflation also rises? The question that the non-professional media gives a positive answer to, and with the speculations they create in this regard, they try to impose a red color on the stock trading board by receiving any positive signal of a decrease in inflation expectations. We have not seen much in the past months and years that we have seen increasing pressure from sellers in the glass hall with the positive news about the nuclear talks. But what is it like in the world?
Studies show that the brightest performances on the world’s most advanced stock exchanges occur at a time when inflation has been declining, and conversely, any signal of rising inflation has led to a massive fall in prices in these markets. In late October, for example, global stock markets feared a 0.3 percent rise in inflation in 19 eurozone countries in the 12 months to October. Conditions that led to the massive collapse of global stock exchanges.
On Wall Street, all indicators were down. The Dow Jones Industrial Average fell about 0.6 percent. The “Stand P500” index fell 0.3 percent. Another important US stock index, the Nasdaq Composite, fell 0.3 percent.
On European stock exchanges, the “Fotsi 100” index of the London Stock Exchange decreased by 0.5% compared to the previous day. Asian stocks also reacted negatively to rising inflation, with the Nikkei 225 Index of the Tokyo Stock Exchange falling 0.4 percent and the Hong Kong Index of the Hong Kong Stock Exchange falling 0.25 percent because everyone knows that rising inflation caused economic instability and the failure of the real sector. Economics and skepticism are invested, and this means slowing down the growth of the real sector of enterprises.
Yesterday, a report entitled “Remaining Inflation to Investors” examined the details of the statistics of industrial establishment licenses in the first half of 1400. Statistics show that rising costs and rising inflation in many industries have increased investment costs to such an extent that the industrial sector in 26 different disciplines is in greater need of financial resources than in the past; This is reflected in the investment forecast for industrial licenses. On the one hand, this situation has made it more difficult to enter production, and on the other hand, it has reduced employment created by industrial licenses.
The situation of the stock market by overcoming the flood of inflation
After all these explanations, it is time to examine the situation of the stock market after controlling inflation, whether we should invest in the stock market carelessly by controlling inflation? Is reducing inflation the enemy of making a profit on stock exchanges, especially the Tehran Stock Exchange? The answer to these questions can be given with a resounding “no.”
It is true that the experience of the past years has shown that in inflationary periods, due to the high risk of holding cash, we see an increase in capital inflows to the asset market, worried about the devaluation of the rial, and this along with the growth of the dollar It will be sent to export-oriented companies, which will cause inflation and, of course, temporary growth in the market and stocks, but the vast majority of economists believe that with economic stability, the stock market can also experience real and sustainable growth; Because with the control of inflation, the real sector of the economy has started to prosper, and this issue can lead to a stable prosperity of the stock market.
In addition to the support of economic theories for this claim, a look at the state of the world’s advanced stock exchanges also confirms this fact. In other words, we see a steady boom in stock markets when inflation is curbed, economic instability occurs and investment is economically justified. In such circumstances, it will be possible to calculate the economic justification of the plans. But that’s not all.
In the context of economic stability, one can hope that the policymaker will abandon the dictatorial policies that are perhaps the most important obstacle to the profits of many economic enterprises in the country, and a large part of the stock exchange industries that are currently affected by such policies will find a favorable situation in terms of profitability. they do.
With lower inflation expectations, rival markets will also perform more steadily, and capital will gain more thinking power, and this is where the stock market will have a better chance of attracting money. At the same time, with lower inflation expectations, livelihood concerns are reduced and the shareholder avoids emotional behaviors in the market.
With the reduction of inflation, the income and expenses of the investor will naturally be balanced, so that in addition to increasing the investment power, we will see an increase in the sales of domestic companies. At the same time, the costs of manufacturing companies will decrease, and in general, we will see a two-way growth in the profitability of listed companies. If we want to examine the opposite of this story, with the increase of inflation, the purchasing power decreases and the sales of companies also decrease, and thus, the profitability of companies decreases. On the other hand, the cost of goods and products for companies will increase, which will reduce companies’ profits.
As companies’ real profits fall short of their projected profits, their stock prices fall and can affect and reduce the stock market index. But more importantly, with economic stability, policymakers have dared to resort to surgery and invalidate rules such as volatility and volume, and complete the stock exchange toolbox so that the country’s stock market is an efficient market with real growth and Of course become stable. A win-win game that will benefit the general public and a market that can be relied on for profit in all eras.
Source: the world of economy
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