Could U.S. markets remain high despite surging inflation?

(Xinhua) 09:16, April 01, 2022

WASHINGTON, March 31 (Xinhua) -- Despite surging inflation, U.S. markets are near all-time highs, and some economists believe they will remain so for the next 12 months.

While markets have seen some turbulence, the Nasdaq, Dow Jones and S&P 500 Index are considerably higher than their pre-pandemic levels of January and February 2020 -- roughly 5,000, 7,000 and 1,300 points, respectively.

Despite a 7.9 percent year-on-year inflation hike in February -- the largest increase in 40 years -- average hourly earnings have increased by 5.1 percent, according to the U.S. Bureau of Labor Statistics.


While that is bad for working folks, corporations have benefitted, and so has the U.S. stock market.

Indeed, corporate profit margins are the fattest they've been in 70 years, according to data from the U.S. Department of Commerce.

"The profit boom that's going on is keeping the stock market aloft," John Blank, chief equity strategist and economist at Zacks Investment Research, told Xinhua.

"Companies are raising prices more than they're paying workers," he said. "Profits have never been higher."

"Do I think it ends? Not for at least a year," Blank said.

James Paulsen, chief investment strategist of The Leuthold Group, noted in an article on the company's website that "in the midst of widespread panic about runaway inflation, the financial markets are remarkably calm."

"Consider the response of the major financial markets today compared to the last time the U.S. was experiencing runaway inflation during the 1970s," Paulsen said.

"Thus far, in the face of surging inflation, the contemporary behavior of the stock market relative to the 1970s' experience could not be more different," Paulsen added.

"Much higher inflation resulted in much lower stock prices. By comparison, today, the stock market seems fairly unconcerned about inflation," Paulsen contended.

From 2019 forward, the stock market has had a positive correlation with the inflation rate, and that is still the case-even since the start of 2021 when inflation began to rise significantly, Paulsen argued.

"Yes, the stock market has recently suffered a correction, in part due to inflation fears, but the size of this correction is quite mild (at least so far) versus the outsized inflation upswing of the last twelve months," according to Paulsen.


Meanwhile, Fed Chair Jerome Powell recently said the central bank would be willing to show more aggression in hiking interest rates in a bid to tamp down inflation.

Investors fear that if the Fed moves too fast and furious, that could put a major damper on markets, or even spark a recession.

Others believe that Powell does not have the backbone to raise rates at a pace quick enough and high enough to spark an economic downturn.

Some U.S. media are comparing the current economic conditions to those of 1977.

"After two years of robust growth in 1975 and 1976, the Dow Jones plunged more than 17 percent in 1977 due to several factors, including easy money policies since the early 1970s, soaring oil prices, rising unemployment, and increasing consumer prices," noted Insider Monkey, a finance website, in an article reprinted in Yahoo Finance.

"In 1977, investors were concerned about the widening U.S. trade deficit and worried that the Fed might tighten credit, which would trigger an increase in interest rates. In addition, a combination of the recession and struggling industrialized democracies also contributed to bearish sentiments," the article reported.

Some, but not all, of those conditions are reflected in today's economy. But the jobless rate is not nearly as high as it was in the two years preceding the crash.

Some have criticized this comparison, saying today's market climate is nothing like that of the 1970s. 

(Web editor: Xia Peiyao, Liang Jun)


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