Why does the stock market always go upNamaste!
I have been sounding bearish for the last couple of years. But, let me clarify that the stock market always goes up because of inflation . Inflation is the most important factor in my opinion, which results in upward movement of stocks and the stock market as a whole.
Since the start of industrial evolution in the year 1760 in England, there is one thing which is common across the different countries, different companies, different sectors, it is "inflation".
Let's understand why there is inflation.
1. Humans have unlimited demand for goods and services, but limited supply. So, if the demand outpaces supply, we will see the prices rise, that is inflation.
2. Investment today for future returns only: The money spent today in business, demand higher returns in the next year, thereby creating an inflation.
3. The rising population increases the number of consumers, thereby increasing demand and inflation. Sometimes some of the population spends "inefficiently" and on unnecessary things. For e.g. you need one smartphone about every 4 or 5 years. But, since some population is not disciplined and has easy access to debt, they try to upgrade smartphones every year. This puts extra pressure on demand and inflation.
4. Easy access to debt: The debt has been very easy to access since the last couple of decades. Debt helped in boosting demand for goods and services, thereby creating inflation.
5. Supply of money (USD) increasing: If the supply of money increases, everybody has USD, so it boosts demand, which results in inflation. Sometimes excess money supply results in "inefficient spending", which is bad in the long run.
6. Money (USD) is no longer "backed by gold", it stopped in the year 1971 by the then president of the USA. Before that, every USD was backed by gold, thereby "creating a restriction on printing of USD to the actual gold available". It could've kind of stopped inefficient printing of dollars.
I mentioned USD here because it's the world's reserve currency. Whatever happens to USD affects most countries, more or less.
7. Growing GDP: GDP (gross domestic product) is a consumed demand for goods and services. It indicates the rising demand of goods and services in the economy. Without inflation GDP cannot rise.
The GDP sometimes does not show "real development" to me because it doesn't indicate quality of life and well being. For e.g. give one person USD 1000 dollars annually to dig a hole and one person 1000 to fill that hole. It means USD 2000 is a GDP, but, "did it make any difference in quality of life?"
Conclusion: As seen historically, the stock market always goes up because of inflation. But it is also true that market corrections happen. Corrections are like "pedals of a cycle", one must come down to go up.
Disclaimer: This writing should not be considered as an investment or trading advice. This writing is solely based on my understanding and experience in markets. Please consult your financial advisor before taking any actions.
Disclosure: I have short positions in the Nifty50.
