Who Cares About the Stock Market Anyway?
NEW YORK, NY - FEBRUARY 13: Traders work on the floor of the New York Stock Exchange during morning trading on February 13, 2012 in New York City. Following the passage in the Greek Parliament of a key austerity package, U.S. stocks opened higher Monday with the Dow Jones industrial average up 80 points in morning trading. (Image credit: Getty Images via @daylife)
My philosophy for the past few years has been to focus on investing for positive cash flow. By investing for positive cash flow, you can free yourself from the worries of whether your asset has gone up or down in value in the short term - if you have purchased a good asset at the right price (investment real estate, oil/gas limited partnership interest, dividend-paying stock, high yield note, etc.) that pays you cash on a regular basis, short term value fluctuations will not matter.
So what is going on with the stock market lately? If you look at the chart below, the stock market (using the Dow Jones Industrial Average) has benefited greatly over the past year by a more or less steady decline in the value of the dollar (DXY). The decline in the dollar is largely the result of Federal Reserve policy to keep interest rates low, including the quantitative easing. Recently, the dollar has strengthened in response to continued turmoil in Europe. As you can see, dollar strength/weakness is inversely correlated with the stock market and slight movements in the dollar index translate into significant movements in the stock market. Further downside risk to the stock market (and commodities markets, which are all priced in dollars, such as gold and oil) exists in the short term as long as the dollar continues to strengthen.
How long can global demand keep up with the continuous supply of dollars being printed every day? Only time will tell. As you can see in the chart below, the money supply has been growing again since early last year after peaking in 2008.
One thing is for sure, inflation will continue to hurt savers and will benefit those who borrow at fixed rates for the foreseeable future. Official government statistics for inflation (CPI) understate the real rate of inflation (see chart below).
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