Is the Rising Stock Market a Sign of Economic Recovery?

Almost every day now we hear optimistic reports about the stock market suggesting that the economy must be improving because the price of stocks continues to grow (albeit not agressively).

Surely this must be a good sign, right? And if we were to pour cold water on that notion we must surely be the bad guys. But what is the truth?

Rising Stock Market—A Good Thing

Before pointing out the obvious (at least in my mind) reason for concluding that a minor ongoing growth in the market is not particularly a significant sign of recovery, let me take note of the fact that a rising stock market is not a sign that things are going in the wrong direction either.

To the contrary, if stocks were not going up under current economic circumstances it would be very bad, indeed. But the fact is that it is going up and for good reason, but not necessarily because of any recovery.

Why Is the Stock Market Rising?

It is easy to be confused about the economy. The reason is that most of what we see in the news is distorted by political viewpoints and wishful thinking. But if we look at the factual context of the economy we are more likely to come up with a correct understanding of most economical realities.

One fact that has a direct impact on the stock market is one seldom acknowledged. The government has been printing a lot of money, billions in fact—dollars that have no relationship to increased productivity and an expanding economy. Much of this is done by the Fed buying government bonds to help underwrite deficit spending.

This inevitably if not immediately causes a devaluing of the currency and inflation. In other words it takes a dollar today to buy what ninety cents might have just a short time ago. This means that stock prices will necessarily continue to rise a certain amount without any increase in the real value of the stocks themselves.

Impact of the Rising Stock Market

There are two conclusions that I draw from this situation. The first is a perspective of the stock market growth in general as I look at all decisions about money. The other relates more to our buying possibilities.

First, I never get excited about day to day changesd anyway. People are fickle and make a lot of short term decisions that don’t make much sense. My view is that a slow growth in the stock market basically means nothing about the economy in general. Better to look at other factors.

But second, I think there is a basic outlook to adopt. In the long term the stock market will grow, and grow a lot. The value of the stocks may not be any more, but the price will be up, and eventually (as major inflation hits) up big time.

With low investment income possibilities elsewhere, to put our money anywhere else means that the amount of money we have may remain steady but its value at the grocery store will be less. If we invest in our total stock market fund, the face value of our investments will go up even if it will not buy more at the store.

The Rising Stock Market and My Life

What all this means to me is simply this. I will continue to put some money into stocks because I am convinced we face long term inflation. Businesses have generally adjusted to the new realities and I have confidence in the value of their stock as long as the companies are sound.

I will not be surprised if there are some significant, although temporary, declines in the near future because the economy overall is not particularly sound and will not be until the government makes the same adjustments businesses and individuals have. If you think long term, and that is the only way I think, stock investments may be the only way to avoid losing value.