In recent days, CNBC has been aflutter with talk of the S&P 500 (SPY) nearing a new all-time high. The all-time closing high in question occurred on October 9, 2007 at 1,565.15. The intraday all-time high was reached a couple of days later, on October 11, 2007, at 1,576.09. But just so we avoid any double standards, I would like to remind equity investors of something they remind investors in gold (GLD) and investors in bonds (AGG) all the time -- it's the "real" value, rather than the nominal value, that matters.
What do I mean by "real" value? The real value refers to the inflation-adjusted number, while the nominal value refers to the unadjusted number. Gold investors are constantly reminded that the highs it reached in 2011 were only nominal in nature. On a real basis, gold still has not made a new all-time high in over 30 years. And bond investors are constantly reminded about the negative real rates being offered across large parts of the yield curve in recent years. With that in mind, how close is the S&P 500 to its real all-time high? Let's investigate.
The U.S. Bureau of Labor Statistics has on its website a "CPI Inflation Calculator." Given that I have yet to come across a person who believes the government's reported inflation figures are overstated, this calculator should provide a respectable minimum number at which the S&P 500 would need to be in order to reach a new real all-time high. Using the "CPI Inflation Calculator" and the 2007 nominal all-time high of 1,576.09, we discover the S&P 500 would need to reach 1,764.79 in order to top the nominal high on a real basis. A raging stock market bull might be thinking, "That's not too bad. We might get there this year." Perhaps we will. But that actually isn't the real all-time high.
In March of 2000, the S&P 500 traded at 1,553.11, a level that at that time was a new real and nominal all-time high. By plugging 1,553.11 into the BLS' inflation calculator, we discover the S&P 500 would need to reach 2,093.96 in order to touch its real all-time high. That's more than 30% higher than where we are today. In other words, over the past 13 years, the S&P 500, on a capital appreciation/depreciation basis, has a massive negative real return.
Of course, there are those who will attempt to cushion the blow from this staggering loss of real wealth by bringing reinvested dividends into the equation. But let's remember that investors take their dividends and do a wide variety of things with them. Some people spend them while others park dividends in a checking account. Another group of investors might take their dividends from a fund tracking the performance of the S&P 500 (SPY, IVV, and VOO are three examples) and buy individual stocks with the after tax money. Those individual stocks may have appreciated or depreciated since that time. There are so many ways that investors handle the dividends they receive from a broad-market index. But the one thing those investors do all have in common is the return from the capital appreciation or capital depreciation of the index. And in the case of the S&P 500, on a real basis, the return is quite negative when compared to its real all-time high.
Over the coming days, when you hear talk about a new "all-time high" in the S&P 500, remember to take the news with a grain of salt. I am sure there are many equity-focused investors who might consider today's bond investors certifiably insane, given the negative real rates so prevalent today. Before spreading news of the S&P 500's new all-time high, those same investors would do well to also consider the real versus nominal return of an investment in that stock market index.