Stocks are up, but so are consumer prices. What’s the connection?
Stocks are up, but so are consumer prices. What’s the connection?
Stock market indexes keep hitting new highs this year. The Nasdaq and S&P 500 both set records Friday and came in even higher Monday.
In fact, this year and last year have been good ones for the stock market, thanks in part to some star performers in the tech sector. But as share prices have risen, the cost of pretty much everything else has too, though at a much slower pace.
Inflation is well down from its peak in 2022. But according to Jim Angel, a finance professor at Georgetown University, there are ways that price gains throughout the economy can raise stock prices specifically.
”Let’s suppose that the inflation fairy came and doubled the price of everything overnight,” Angel said. “Well, then all the assets that companies own would also double, and those inflated assets can be part of what determines a company’s stock price.”
Another part, said Sameer Samana, a market strategist with Wells Fargo Investment Institute, is a firm’s earnings. Those, too, can get a boost from rising prices.
“There probably is an inflation component to stock prices for no other reason than the things that companies sell, the goods and services, they are priced in nominal U.S. dollars,” Samana said.
Nominal, meaning not adjusted for inflation. But even if inflation is impacting stocks, along with everything else, it alone can’t explain the current runup in stock prices, said Kelly Shue, a finance professor at Yale University.
”Even if we were to inflation adjust, it would still be very much the case that the stock market has outpaced inflation,” Shue said.
The S&P 500 and Nasdaq have easily posted double-digit gains this year. That’s even though inflation is often bad news for stocks, said Shue, because it causes the Federal Reserve to step in and cool the economy down.
”When the Fed is raising interest rates, that tends to reduce the value of the stock market,” Shue said, adding that recent stock gains “are in spite of inflation and the associated rise in interest rates, rather than because of it.”
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