All economic specialists are telling us that with the arrival of inflation, we are heading into an economic recession. Central banks are raising interest rates, and all sectors of the economy will go wrong, from the traditional stock market to cryptocurrencies. We are entering a crypto bear market.
Newspapers worldwide are quick to titter, “Recession is upon us.” Yet I have not found a serious explanation for why we are entering a recession.
This report will look at the correlation between inflation and stock prices. Will high inflation lead the stock market (and cryptocurrencies) into a prolonged bear market?
We will see that this assertion is the result of a lax analysis. Inflation does not lead to a stock market crash, much less a crypto bear market.
Inflation is the cause of the crypto bear market
The idea that inflation will lead to a crypto bear market is very simplistic. I disagree with this idea. There are a few things to point out.
There is no causal connection between inflation and negative stock market performance. Most analysts think solely of the 1970s-80s inflation that saw a causal relationship between high inflation and negative stock market performance. In fact, between 1970 and 1980 (10 years), inflation was very high, and the stock market was sideways.
Not only was the stock market (cryptocurrencies did not yet exist ) sideways, but the periods of highest inflation (the ’70s and ’74s) coincided perfectly with a market crash.
Between the 1970s to ’76, this phenomenon occurred twice:
When inflation went up, the stock market collapsed; conversely, when inflation went down, the stock market went up.
It appears the analysts are correct: there is a solid correlation between high inflation and negative stock market performance. The macroeconomists are right. Are we heading for a market collapse?
The answer is: No, we are not in a crypto bear market.
But let’s look in detail at how things went in the ’70-’80 cycle:
Inflation at 6 percent (1970): stock market goes down
Inflation at 3.3% (1972): stock market goes up
Inflation at 11% (1974): stock market goes down
Inflation at 5.8% (1976): stock market goes up
And then this correlation breaks down:
Inflation to 13% (1980): stock market goes up
So the high inflation-negative stock market correlation was very short-lived. Already in 1980, it had broken down. We don’t have enough data to say this is a stable correlation. That is why I say we are not in a crypto bear market.
After 1980 inflation came back down and would not show up for another 30 years. Now it is back, and everyone remembers the inflation of the 1970s.
What if there is no correlation between stock market collapse and inflation?
Bear market: let’s investigate throughout the twentieth century
Fortunately, there have been other inflationary phenomena throughout the twentieth century that we can use to test their effects on the stock market to determine whether we are entering a crypto bear market.
Over the years, there have been at least three major inflationary spirals (inflation around 20%): ’16-’18, ’43-’49, ’70-’80. We can also see minor inflationary spikes (inflation around 5%) in ’88-’90.
Since high inflation is returning, it is helpful to ask what happened in the past during the high inflation phases. Can this high inflation lead to a collapse in equities prices and a crypto bear market?
In ’88-’90, there was a rise in inflation to 5.4% ( Not very high, but not very low either), and the market rose continuously without any hesitation for three consecutive years.
We can observe that in ’88-’90, the market went up during high inflation. This gives us hope and moves us away from the whimsical idea that we are entering a crypto bear market.
There was a very high inflationary spiral between 1916 and 1918 (at the height of WWI). Inflation reached almost 18%. We are talking about twice the inflation in the U.S. today. Despite double the inflation, the stock market went up most of the time. The only bad year was 1917.
In 1916, 1918, and 1919 the Dow Jones went up despite 8%, 17.9%, and 14.5% inflation.
Again we saw how high inflation is not at all a trigger for a crypto bear market.
Even in ’43-’49, despite high inflation (between 8 percent and 15 percent), the market spent more time going up than down. After an almost 4-year climb (’42-’46), eventually, the market corrected as it does physiologically. It is normal for the market to correct after 4 years of bull run, it doesn’t depend on inflation.
We have seen that the market goes up and down whether there is high inflation or not. We can infer from this that there is no correlation between high inflation and economic recession.
Conclusion
In this report, we have explained that there is no relationship between high inflation and economic recession. In the next articles, we will explore the issue of economic recession in more detail to realize whether we are in a secular bear market or whether we are in a cyclical bear market.
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