S&P 500: Inflation Adjusted Chart Looks a Little Different

When you have to look at the same chart over and over again it can get a bit boring so here’s the ‘real’ S&P 500 - inflation adjusted:

The chart shows monthly data from 1900 to February 2009 and is logarithmically scaled so that a percentage move in any year is comparable to other years. I’ve used the CPI (monthly) data available from official US government sources. Some say it is under-reported but what other real alternatives do we have? Removing the distorting effect of inflation is important for long term charts and also because we know that the Fed is doing all it can to create inflation. The most recent data shows the largest one year increase in money supply.

Like walking down your hometown streets, things look similar but different. For example, the chart doesn’t show the massive double top that is now recognized by everyone. Also, from 1900 to 1950, the market tread water after inflation. Then a roaring bull market followed, to then be deflated by an equally intense bear market.

Most interesting is that the bear market low is July 1982 - not 1975 as we usually see on non-inflation adjusted charts. This is where the bull market that followed next was launched. The inflation adjusted level of 238 acted as support, just as it had acted as resistance on so many occasions (temporarily pierced only by the roaring bull market of the 1920’s).

A similar situation is setting up today. We had a bull market that took us to new inflation adjusted levels and subsequently almost all the air was let out because the market is now back to where it broke out from the 1968 top. To be accurate we have a little more air to let out before the market ricochets off that level once again.

Assuming that this is the playbook the market is following; and if not, cheer up! we can only go to zero.

Comments

[tinscale:]

Nice job. A graph with your analysis based on the CPI as calculated by John Williams would be interesting. You can get those numbers at shadowstats.com

Mar 04 11:19 AM

[a believer:]

Great perspective.

When you say *...the chart doesn’t show the massive double top...* to me it shows very clearly. (??)

I am curious - what is the second suppot level (1968 top) you show in today's index value? It looks like about 650.

Mar 04 11:59 AM

[Paul_L:]

Looks like heading to 1995 number, which is about 600 nominal, yes? New Chinese stimulus might help, probably not as long as banks are under the cloud of being stress tested and constant conflicting messages from the Top of this country.

Mar 04 12:37 PM

[igggy:]

You can't do a technical analysis on this chart. You are possibly the only person looking at it this way. Do you think market psychology automatically adjusts prices for CPI?

Mar 04 01:17 PM

[traderstrat...:]

Keep updating the chart as long as we are in the wood. For those who agree with your efforts will appreciate.

Mar 04 02:11 PM

[Das Ram:]

One important factor to consider is that this time around there are a few very significant differences in the make up of the S&P 500.

Over the past 50 or so years, there have been less and less Pension funds taking on the burden of providing retirement income for workers. This was replaced with 401(k) and 403(b) accounts. These accounts allocated close to 90% of contributions to Equities. This is grossly different than an allocation within a Pension.

In addition to that, the only way to allocate within those accounts (and the vast majority of taxable accounts outside of Qualified Programs) is still the use of Mutual Funds.

These fund managers, be it Vanguard (un-managed indexing) or American Funds (actively managed) do not give Investors the Choice of not participating in companies who are excessively compensating the Executives. This needs to be halted ASAP and more importantly - Recognized and Broadcast. there are easy solutions to this problem and I hope you understand the gravity which this one issue holds to ALL the Greed Problems associated with today's economic issues.

The Greed is Also and Firstly (please make this distinction) by our Congress! Because GDP growth and Tax Revenues from that monetary base is so important to their social programs (Vote Getters), that they MUST continuously Lever the Economy to stay in office.

I believe this One last issue will also go a great way to removing the obstacles to Free Choice for business owners and managers: The disparity between Capital Gains Tax and Dividend Income Tax. This MUST be Equalized (and because I feel so confident in our politicians to only try cocaine once, I think it would be best if they were both capped at ZERO %). But that is just my Political view as; Anyone can give more of their money (Time and expertise) to whomever they want, the just can't make the rest of us do it too.

The Clinton Congress saw this disparity as easy as shooting Fish in a Barrel - sorry to throw more political daggers. e levered this disparity to a point where Boards were not able to effectively pay dividends to the owners of companies. If you recall, they demonized those Wealthy Bastard as not needing that income. This of course DID spur economic growth, but at the detriment of a policy of Growth At All Costs, instead of when Opportunity presented itself. This of course lead to companies taking on greater and greater risk and eventually getting Too Big To Fail.

In closing, this is all culminating today because of these policies because there are no more levers to pull. The largest and wealthiest part of our population are in the starting blocks of Retirement and will no longer be contributing to these plans. Because they cannot afford to OWN Stocks and be able to pay bills or take vacations (as None of us can anymore, because stocks DON'T pay us anything), we have ALL become Traders, like it or not. I would also have to say that the close to 50% of the population (unlike any other time in history) that is invested in the market is also the Wealthiest, not the weakest. Since they HAVE to sell to go buy a Big Mac or gallon of gas, who is going to step in and purchase those shares?

These are really easy fixes, but must be implemented in order for an Orderly Market ongoing. As always; bring back Free Markets and you will bring back "Commonality and Community".

Mar 04 06:11 PM

[RiskReturnO...:]

Great analysis. I'll be be following this methodology.

Quick question:

If S&P trades around 700, how many years will it take for the inflation adjustment (assuming say 2-3% inflation per year) to take the chart down to the green line?

Stated another way, if we believe the market has entered a prolonged "bottoming process" and hold S&P @ 700 level, how many years of inflation will be needed to drag the chart to the support level?

This churning process may end up forming a strong base for a prolonged bull market ... your calculation will let us know when the real bull market might start?

Thanks.

Mar 04 08:09 PM

[Delta David:]

This is the only realistic way to took at actual, not inflated, values. I would love to have a table for the valuations. Thanks.

Mar 04 09:27 PM

[Das Ram:]

Good question, but my point was to make sure the consideration for a VERY different set of circumstances are considered in any and all methodologies. At this moment, it is guess work at best as to how much artificial inflation has been pushed into the current market.

But then again, it is why we are investors and investing has and always will be more of an art than a science!





On Mar 04 08:09 PM RiskReturnOptimizer wrote:

> Great analysis. I'll be be following this methodology.
>
> Quick question:
>
> If S&P trades around 700, how many years will it take for the
> inflation adjustment (assuming say 2-3% inflation per year) to take
> the chart down to the green line?
>
> Stated another way, if we believe the market has entered a prolonged
> "bottoming process" and hold S&P @ 700 level, how many years
> of inflation will be needed to drag the chart to the support level?
>
>
> This churning process may end up forming a strong base for a prolonged
> bull market ... your calculation will let us know when the real bull
> market might start?
>
> Thanks.

Mar 04 09:30 PM

[Das Ram:]

If you are going to make Poor Comment marks on people's blogs, at least have the consideration to share WHY you feel as such. If you have some discerning view points that add new information to people's hypothesis, then share it and enlighten us all! You could be correct!

Mar 04 09:38 PM

[dcb:]

you have got to add what that support level is. huge mistake and while the analysis is interesiting without that key number it renders it useless. read the comments on your post and make the correction. please

Mar 05 12:17 AM

[Fred Voetsch:]

I just love it when people start coming up with special charts that nobody else uses and that are not pertinent, in order to justify their views. Larry Kudlow is a master of this and we see how well it serves him.

Such information should be used not to justify ones views but to add a tiny bit of insight laid upon all the other traditional and real-world data.

Mar 05 01:29 PM

[big dave:]

didn't he say 238?


On Mar 05 12:17 AM dcb wrote:

> you have got to add what that support level is. huge mistake and
> while the analysis is interesiting without that key number it renders
> it useless. read the comments on your post and make the correction.
> please

Mar 10 02:02 PM