Measuring the Impact of Dividends and Inflation: Comparing the 2000 and 1968 Bear Markets

Oct.19.10 | About: SPDR S&P (SPY)

Here's an update of a chart I last posted a little over a year ago comparing two secular bear markets — the current decline since the peak in March 2000 and the S&P 500 from its peak in 1968 to its bottom in 1982.

The first chart is a overlay of the index price for the two periods excluding dividends. At first blush, the 2000 secular bear looks like the more savage beast.

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Now let's adjust both for inflation using the BLS Consumer Price Index.

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Most people, even first wave Boomers, don't realize the savagery of that earlier 14-year decline other than perhaps a recollection of the decade of stagflation that started with the 1973 oil embargo. The chart illustrates how both bears behaved over the decade following their peaks and how the stagflation bear continued its race to the bottom for another four-and-a-half years.

It will be interesting to check back in four years to see who wins this battle of the bears, especially if the Federal Reserve opens a Pandora's box of inflation with its next round of tinkering.

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Total Return

The next chart is an overlay of total returns (dividends reinvested) for the two periods. Since stocks paid much higher dividends during the earlier period, the performance of the 1968-1982 is dramatically superior to the returns we've seen since the market peak in 2000.

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After we adjust both for inflation (using the BLS Consumer Price Index) the apparent dividend advantage of the earlier period gradually evaporates.
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Of course, the timeframes illustrated in these charts are radically different from one another in many ways — inflation rates, dividend yields, federal debt, average GDP, among them. When future historian compare these two periods, they will probably point to the demographic shift from young Boomers in the early phases of their careers to aging Boomers on the threshold of retirement with a growing sense of their financial vulnerability.

Disclosure: No position