Monday, February 28, 2011

What Has Government Done to... Our Stock Returns?

Leaving aside for a minute the Austrian theory of the business cycle, and asset bubbles and whatnot, this graph shows pretty explicitly just how damaging inflation is. 

CPI is the red line, indexed to the secondary axis. The S&P 500 nominal is the blue line (Adj. Close) which includes dividend adjustments. The green line is the real (adjusted for inflation) S&P500, indexed to be equal to nominal S&P500 in Jan. 1960. Both S&P 500 indices are mapped onto the primary axis. Yeah. Prof J out.


  1. What has government our stock returns? Okay. I'm not the sharpest tool in the shed, but from looking at your graph, I'd have to conclude that nominal stock returns have risen. Why isn't this good?

  2. Real stock returns are the issue.

  3. Please allow me to ask another question. How accurate is the CPI? Because if this chart is accurate, my nominal gains in the stock market are really closer to zilch, when factoring in inflation. That really sucks.

    This really changes the way one must plan and invest for retirement. We are given special tax treatment for our 401(k) and the like, which helps to boost our returns, but still. Thanks for depressing me.

  4. CPI is overstated by about 1 - 1.5%/year from 1980 - 1995, and then 0.75% - 1%/year from 1995 onwards. Over ten years, that's an order of magnitude, so the green line should be 10-12 points higher than it actually is.

    I can redo chart using the PCE, but the PCE and CPI only diverge somewhat over the past 10 years, so we'd get the same picture.

    I'm more concerned with the volatility and the fact that we haven't gotten much of anyplace in the past 10 years.

  5. You're exactly right. The S&P 500 reached 1552 on 3/24/00. Today, it's at 1311. That means we've lost our shorts when considering inflation.

    What's your solution? How can we save for retirement? Do we "play" the market; become market timers? They are notorisouly wrong.

    Remember several years ago when they were prediciting Dow 25,000? I think someone even wrote a book on the matter.

    Would you invest in China or India (in a broad based market index)?

  6. There were, in fact, 3 books entitled: Dow 30,000; Dow 40,000; and Dow 50,000.

    For my retirement, I have three funds. One broad world-market fund; one U.S. small stock fund (though I'm rethinking that one) and one bond fund.

    It's very important, I think, to have a world-wide stock exposure. Too much see-saw action in the U.S. and I believe it is going to get worse.

    I recommend market timing if you can; as you point out, though, almost no one can.

    If a person has the time, I recommend deep value investing - searching for severely under-valued companies, buying the shares and waiting. It's a patience strategy but potentially very lucrative.