David Leonhardt explains why records are made to be broken and why one must always adjust for inflation. (NY Times)
The S.& P. 500, which is a much better measure than the Dow, closed yesterday at 1,549, just 1.4 percent higher than the peak it reached in March 2000. Think about what that means. While the price of nearly everything has risen over the least seven years — while the price of bread has increased almost one-third, for instance — stocks have barely budged. They have only marginally outperformed cash sitting in a bureau drawer. So if we are going to talk about a stock market record, we should be doing the same for a whole lot of other things: Loaves of Bread Surge to New Highs
Dean Baker also applauds this piece. My only comment - David should tell Lawrence Kudlwo about real wages ...
pgl: Real wages? Ah, yes, that fictional world where wages are the only way in which people are compensated for their work. Shame it doesn't match up with the real one.
As for the stock market, correct me if I'm wrong, but wasn't there some sort of, oh say, "irrational exuberance" back in 1999 and early 2000? There is, after all, a rather large difference between March 2000's P/E of 28.31 and June 2007's P/E of 17.51.
You can also look at things a little differently than he does by changing the returns to cash. He assumes cash gives zero returns, putting your money under a mattress. But cash can also be though of as investing in three month t-bills.
If you had put your investments into t-bill in June 1999 when the Fed started tightening your portfolio would now be us 34.4% vs a portfolio of the S&P 500 with daily dividend reinvestment that would only be up 24.8%.
The comparisons since Jan., 2001 when Bush took office are 19.3% for cash and 22.9% for the S&P.
Stocks just caught up to cash in March.
spencer: You know, that gives me an idea. I already have the data for the worst-ever actual recorded inflation-adjusted returns for investments of any length in the S&P 500, but what if someone actually achieved those returns - say investing $1000 each year and getting those worst case returns (talk about bad timing!)
Would they ever break even (I believe the returns from 30-day T-bills would better represent the 0% return scenario) and if so, how long would it take? And how would that compare with the value of their investments if they opted for long-term bonds instead with their 2%-3% real returns?
Might make for an interesting post....
Ironman,
I think The Economist did something like that in 1999 or 2000 as an end of the century piece. I'll try to find it if I have time.
If you invested in the market in 1929 it was 1954 before the market got back to where it was in 1929.
If you had invested in t bills in 1929 you would have 25 years of 1% to 3% returns, but for arguments sake call it a 50% return from 1929 to 1954. However, I do not have the data on total market returns, including dividend reinvestment to calculate the actual returns from 1929 to 1954. But, as a general rule before WW II well over half of market total returns were from reinvesting the dividend rather than from capital gains. So including dividend reinvestment it shouldn't have taken you to 1954 to be whole again.
On average, from 1871 to 1958 the dividend yield was 5.3%
It was the December 16, 1999 issue of The Economist. They did follow up articles Feb. 10 and Apr. 6 of 2000.
It was a slightly different exercise than the one you suggest, as it was a cross-border investment exercise. But if you intend to do what you describe, you might want to look at the series of articles anyway.
Ironman - OK. Real compensation. But it's the same point. Kudlow seems to think inflation has been zero for the past 6.5 years.
Thanks, Bill - I believe you've pointed me at the Economist article before back when I first developed the Lemony Snicket investing scenario tools (way back when.) Still, the Lemony Snicket tool used a mathematical model vs actual data, so there's still something new to be explored there.
spencer: You are correct - factoring in full dividend reinvestment, real returns in the S&P 500 were sustainably in the black from February 1949 onward (assuming our hypothetical investor placed their initial investment in September of 1929 at the peak before the Great Crash.
Here's the link to the tool where you can run the numbers yourself for any period from January 1871 through June 2007 (just updated):
http://tinyurl.com/ybayyx
pgl: I think it's a common thing for economic analysts - it's too easy to focus in on a particular set of data and miss the bigger picture (Kudlow and inflation is a good example, Leonhardt and stock market performance from March 2000 to today is a better example.)
The best time to buy stocks were in 1942 and 1949--
yes they were even better than 1933.
Ironman,
Now that you mention it, I do remember that. I'll check out the link you gave as well. Thanks!