Yesterday the first important report of the week was released in the States. It is about U.S. inflation, which has been causing a lot of questions and discussion lately. The fact is that the consumer price level rose 5.4% y/y in July, which is the highest reading in 13 years. What's more, literally 0.3% more and inflation will break the anti-record of the past 30 years. So, for stock markets, rising inflation is really a good reason to start worrying. It should be understood that the stock market can be roughly divided into two categories of companies.
1) Shares that bring a good dividend profit and they are bought because of it.
2) Shares that do not pay high dividends, but constantly rising in value in the long term (Apple, Tesla, Microsoft). But in any case, many investors are looking at dividend payouts. And it turns out that at the moment in the vast majority of cases the level of dividends is lower than the rate of inflation.
2) Shares that do not pay high dividends, but constantly rising in value in the long term (Apple, Tesla, Microsoft). But in any case, many investors are looking at dividend payouts. And it turns out that at the moment in the vast majority of cases the level of dividends is lower than the rate of inflation.
Is U.S. inflation a threat to stock indices?
To put it simply, investors do not get any real profit from buying shares and can only count on the fact that in the future they will rise in value and can be sold at a higher price than they bought them. That is why inflation literally devalues money and is also completely disadvantageous to the stock market. However, at present, this negative effect continues to be offset by the Fed, which continues to inject hundreds of billions of dollars into the economy, some of which is deposited on the stock market.
Thus, despite the fact that in the last year and a half, the U.S. economy has had a strong fall and a difficult recovery, U.S. stock indices are feeling just fine right now. The S&P 500 and Dow Jones made new all-time highs yesterday and the NASDAQ Composite is not far from its highs. So basically, inflation means nothing to the U.S. stock market right now. Investors are still buying stocks, regardless of the CPI. Maybe they really believe Jerome Powell, who has repeatedly said that the acceleration of inflation is temporary and will end in 2022.
Maybe investors just don't see a worthy alternative to stocks. Although, for example, bitcoin is also growing at the moment, probably because many investors are in a hurry to buy it before a new bill is passed in the States, which will regulate the cryptocurrency sphere and all its participants. In addition, bitcoin remains a bailout from inflation, as its growth is much higher than inflation. At the same time, bitcoin remains a super-risky asset, capable of collapsing at any moment.
Thus, we believe that all key U.S. stock indexes will continue to rise until the Fed stops injecting hundreds of billions of dollars into its economy.
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