The S&P 500 in Real Terms

[Update below]

I would love to have a long term chart of the S&P 500 in real terms, though I haven't yet gotten my hands on one, or on the time to put one together given I'm on holiday in France. Still I managed to get a few interesting data-points.

I am just using CPI data for simplicity, but I realize by using CPI data I am opening myself to a barrage of CPI criticism. I understand that CPI data has flaws, but at the same time I feel using Gold or a Commodities Index can be pretty self-deceiving given the sometimes violent short term fluctuations in these measures of inflation. Anyhow, using the Bureau of Labor Statistics' CPI Calculator, I found the following comparisons interesting.

The S&P 500, at 907 today, is, in real terms (Using CPI data as our measure of inflation and weekly data for the S&P), equivalent to:

765 in 2002 (vs. 2002 lows at about 800)

630 in 1994 (vs. 1994 lows at about 440)

555 in 1990 (vs. 1990 lows at about 300)

483 in 1987 (vs. 1987 lows at about 220)

410 in 1982 (vs. 1982 lows at about 100)

350 in 1980 (vs. 1980 lows at about 100)

278 in 1978 (vs. 1978 lows at about 90)

210 in 1974 (vs. 1974 lows at about 60)

Thus we are still below 2002 lows, but haven't hit any previous major lows. It would be interesting to then compare real GDP of the US at each of the above periods, but alas I am off for a day of hiking.

Update:

Many thanks to a comment from evander40, in response to the above. The chart is from the site dshort. Great market perspective with a single glance...

While it appears that in previous major downturns we have gone well below the regression line on this chart, which would at least support the notion that the market still has downside since it needs to overshoot below the regression lines, I wonder if in some shape or form financials may be distorting current analysis. I was pretty lucky to have a viewer submit this great chart, and am not asking for any more. But another interesting chart would be something similar to the below, but for an index of non-financials, giving perspective for an investor who wanted to buy non-financials only. Hopefully somewhere between taking in beautiful French landscapes I will find something.

Comments

[Doctor No:]

Must include reinvested dividends for any time comparison to be meaningful.

May 31 10:03 AM

[Prudent Man...:]

Better off rolling T Bills. Makes for better sleep and happier home life. Especially if you factor into the real risks of investing and not just those theoretical ones ridiculously based up past market volatility which, to me, is of the least important. But then different strokes and many prefer easy to factual.

May 31 03:13 PM

[Dean Morel:]

Hi Vincent
For the sake of fairness you may wish to consider presented Doug Short's bullish case chart of the S&P as well.
www.dshort.com/charts/...
That paints a considerably different picture.

May 31 07:22 PM

[fredissy:]

Why not just get with a good method for trend timing and forget all this crap? Inflation will eat everyone alive that does not beat it in the sense of higher average returns over a long period of time.

May 31 11:12 PM

[Vincent Fer...:]

Doctor No: if you want to know what the market valuation is today vs. previous points in time, then you do not include reinvested dividends. You only include reinvested dividends if you wish to calculate the performance, as in % returns, over a period.

Prudent Man: I respect you opinion, but for me rolling T-Bills is a pretty bad proposition over the long term given inflation, incentives for the US to follow dollar-weakening policies, and current yields available.

Dean: Thanks. Actually I am not arguing hard for a overvalued or undervalued S&P. I actually feel its likely undervalued if pressed to answer, but this post was simply to see a long term S&P chart in real terms. Thanks for the link.

Fredissy: Stocks are inherently inflation-adjusting given that they are claims on companies, which are basically just assets that one can value with any currency, which should be able to increase prices with inflation in general. (If the dollar halves, the dollar price of a Coke will be double) Of course this doesn't necessarily work in the short term, or for some stocks. But the S&P overall should be inflation-adjust.

Jun 01 02:11 AM