The stock market is a funny thing, many people, particularly those who study finance, will try to imply to you that the stock market is efficient. If it comes down 50% and then increases 100% in a year these people will come up with all sorts of excuses of why it went down 50% and then went up 100%, inflation, recession, economy is bad, economy has recovered. Their reasons are usually wrong.Inflation does cause an increase in profit when supply exceeds demand and prices rise, the market will subsequently rise. The economy does become bad, and the profit made by certain businesses do fall. But that does not mean that when inflation goes up the stock market will go up indefinitely.
If you say that inflation is the reason why the stock market has risen, the first thing you should ask is how many percentage of inflation have we had compared to the percentage increase in the stockmarket. If inflation for the last 3 year is 4% each year, then it stands to reason that the stockmarket would have also risen at around 4% each year as well. That's a very simple calculation, and it's probably wrong, but what I'm trying to say here is that if you want to claim that the growth in the stockmarket is because of inflation, you need to see how many percent the stockmarket has rised compared to inflation. The problem here is that most people who say inflation is the reason why the stockmarket has risen have no idea what the inflation % is, much less the increase in the stockmarket.
Inflation isn't a good barometer, if your trying to track the stockmarket growth your better off looking at the GDP, or the gross domestic product of a country. GDP is used to measure the size of the economy of a country. If your economy has risen by 15%, the stockmarket will likely rise with it as well, probably not exactly* 15%, but somewhere around there. This is fairly obvious, because the stockmarket is basically just a few thousands (around 1400 in Malaysia) of big companies in the country, companies which contribute to the economy, which is tracked by... GDP.
Having said that, when the stockmarket drops 50%, there is usually no single reason that can be pinpointed to the reason why it has dropped so significantly, generally it starts out with a valid reason, like the economy going into recession, when everything starts to fall, people panic and start selling, which leads to a bigger fall, the same thing happens when the market starts going up to unreasonably high levels, everybody starts to buy, every tom, dick and harry starts to enter into the market because his mother, brother, butcher and his dog has made money from the stockmarket. The market becomes very overvalued, and when the business cycle starts to kick in, or something big happens like the recent financial crisis and the economy comes off its high, people start selling, and then you have your massive drop in price, everybody panics and nobody wants to be the last guy holding the ball.
This is what it looks like on a 5 year graph of the klci...
I actually called the bull market when it was happening, I know quite a few people were talking about it, I remember telling them it was a bull market..... I wonder how much they lost in that period...
Take a look at the recovery, does it look like a mini bull market?
PS: KLCI changed their index to base off 30 largest stocks instead of the previous index following 100 stocks.
ahh what else to write... to be continued later.
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