Chart of the Day - Inflation Adjusted Dow

by: John Lounsbury

The following chart (courtesy of shows that the current market valuation is right in the middle of the historic price range band. It is interesting to note that the two previous declines within the band took approximately 20 years (1929-1949) and 17 years (1965-1982). A similar time span now would extend to 2024-2027, using 2007 as the top, and 2017-2020, using 2000 as the top.

This chart takes me back to two previous articles looking at reversion to the mean for stocks (here and here). These articles took two somewhat different views of how long range cycles could be viewed in evaluating the current market.

Both articles show how, historically, stock market performance and valuations have cyclically exceeded means and then gone below long-term averages. Right now, both articles show metrics that are near means after an extended period of time above average. The implication is that we have a number of years coming below long-term averages, if historic patterns are to be repeated.

The Chart of the Day is another expression of the same story - near average position following a long period of time above average. Will the pattern of history be repeated? Will we have several years of underperformance yet to come for stocks?