The nature of the relationship between stock prices and inflation is a matter of debate. Some evidence suggests that returns are lower in periods of high inflation, possibly because higher input costs put pressure on corporate margins, and struggling consumers are slower to buy. Other evidence suggests that stock prices are not impacted by inflation, as companies are able to respond to rising prices by raising their prices. Nevertheless, inflation is a good indicator of what is going to be happening to interest rates, and there is good evidence that stocks perform better when rates are low, and worse when they are high (probably because when interest rates are high, people put their money into fixed income assets that are delivering good returns at lower risk, and because corporate interest payments increase in periods of high interest rates, putting pressure on margins). As you can see from the chart below, inflation fell throughout 2009 and 2010, as did interest rates. This doubtless gave some impetus to stock prices. However, inflation began to rise in late 2010, and has been close to breaching the 6% ceiling set by the Reserve Bank since then. In response, rates have started to rise. Although the relationship between these things and stock prices is complex, higher interest rates are usually not positive for stock prices; this is another macroeconomic indicator that suggests stock price may not be able to rise indefinitely. Finally, lets look at employment. As you can see, since the happy days of late 2008, unemployment has increased in South Africa, and has yet to return to pre-recession levels.
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