One of the hottest stock markets in the world is in Turkey – of all places!
This is shocking because the rule of law is suspect there at best – and because the inflation rate has been as high as 80% in recent years.
But, as CNN explains here, the gains have been driven by Turkish investors snapping up stocks to preserve the value of their inflation-crushed cash.
So, yes – the threat of inflation is just one of the reasons I still love stocks – although very few analysts expect the U.S. to see Turkish inflation levels.
Looming Stock Market Crash
I have blogged about a potential stock market crash or at least a substantial correction many times, including this blog that went viral in February: When Will The Stock Market Crash? Billionaires Think It’ll Be Soon
I still think the stock market will correct, and it will likely do so this year** – but I don’t think anyone should sell all of their stocks. I always just repeat George Gammon’s advice and advocate diversification across asset classes and remaining liquid enough to pick up bargains – should the stock market correct significantly.
**In this recent Julia La Roche podcast, Tom McClellan explains why stocks will correct (less liquidity; lower earnings).
Here are some of the reasons why I will always like stocks.
Timing
Mr. McClellan and many other analysts make a strong case for a correction this year, but many other analysts think stocks will remain on a tear throughout 2024. So, once again, nobody has a clue what will actually happen, given that there are so many unknown variables at play, including overseas events, fiscal policy, Fed policy, currency factors, inflation, labor markets, etc.
Fed Policy/Government Policy
Jeff Snider, Don Johnson, and many other pundits on X remind us often that the Fed will likely fire up its Quantitative Easing (QE) machine again in response to an economic crisis. As a reminder, QE involves the buying of bonds or other assets, by the Fed, in order to artificially support the price of those assets. While this does little to help the economy, per Mr. Snider, it does seem to have the effect of propping up asset prices, including both stocks and real estate – tremendously benefitting the top 1% (who also happen to be large political donors – which I am sure is just a coincidence).
Artificially low rates also tend to prop up asset prices as investors clamor into stocks in an effort to find adequate returns. We are not there now, but we could definitely return to that point.
And loose fiscal policy (government spending) can also prop up the stock market for a variety of reasons.
In any case, neither the Fed nor our politicians like to see a weak stock market, as it tends to have a very negative psychological impact on voters (and donors). So – much is done to prop it up.
Inflation Hedge
Many stocks are an excellent inflation hedge, as most readers know. This Forbes article recommends snack food companies, energy firms, and pharmaceuticals, among other things.
And, if inflation really heats up, stocks can perform far better than expected, as people pour into stocks en masse just to escape a crashing currency (like we’re seeing in Turkey).
I might add though that the stock market in general performed very poorly in the inflation era of the 1970s. So, investors still need to be careful.
Dollar Strength and Dollar Milkshakes
Brent Johnson often reminds us during his podcasts that foreign investors can push up U.S. stocks significantly too for a variety of reasons.
Stocks are appealing as a hedge against a rising dollar – when the dollar is rising against foreign currencies (like what is happening now).
They also appeal to foreigners who just want to escape their own economy if it is too weak (assuming capital is allowed to leave the country).
And – if Mr. Johnson’s Dollar Milkshake Theory comes into play (where the global supply of dollars does not come close to meeting demand), the dollar’s value will go through the roof and so will U.S. stocks.
When that will happen is anybody’s guess, but … if you listen to Mr. Johnson enough, you will come to believe that it will happen at some point – and you will want to own stocks.
Once again, I have no idea what will happen, I am certainly not an expert, I am oversimplifying some of the topics above, I still recommend discussing any moves with a qualified financial advisor, and most of the analysts I follow never recommend going entirely into or out of any single asset class. They just like diversification.
Final Note: Real estate benefits from all of the same factors I list above, and that is why I will forever remain a real estate bull as well.
