Thursday, October 18, 2007

Stock Market Inflation

Is there inflation?

Again, that's like asking, "What is the temperature of the United States?".

Well, it very much depends on where you are looking.

The same trader who gave me that insight over a decade ago also posited that a "high stock market" was profoundly inflationary as it meant that it was currently "more expensive" to save for his retirement. I completely agree.

My wife works for a large financial company. A large portion of her pay is in restricted stock - so we already own a bunch of it. Now understand this, I DO NOT ROOT FOR THE STOCK TO GO UP. She gets her allotment in I believe January; it's a fixed dollar figure so the lower the stock price the more shares she gets. The last thing in the world I want to see is her company's stock jump 20% right before the disbursement.

Why do I bring this up? Well, if you hadn't noticed, the stock market recovered all of August's losses and then some. The NASDAQ is at a 7.5 year high while the Dow and S&P500 (notwithstanding the NYT) recently hit all time highs. If the stock market is going to be say on average 10% lower next year, then everyone who is dumping money this year into their 401k's, SEP's, Keoghs, annuities, mutual funds, etc., will be effectively losing 10% of their investment right off the top. That's an immediate asset erosion which can be construed as inflation.

I don't want to get into the very real possibility that the market could be higher still next year and retirement savers would be wise to buy at today's lofty prices. I just want to make this somewhat counterintuitive point that while high stock prices might be good for yesterday's investments, they aren't at all beneficial to present-day investments.

Say that no matter what, the Dow is going to be 75,000 in 40 years. Wouldn't you have wanted most of your "buys" to have been made at very low levels?

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