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The Real Stock Chart


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March 19, 2007

The Real Stock Chart

Michael Mandel

As I was working on my commentary this week, I constructed a stock chart the way it is supposed to be:

1) Total return on the S&P 500, rather than just the price of stocks

2) Adjusted for inflation

3) On a logarithmic scale (so that equal percentage moves look the same)

Here it is. It's set for December 1996 =100 (the date of Greenspan's irrational exuberance speech) Notice that the 1987 crash looks like a horrifying but ultimately small blip. Note also that we have still not gotten back to the peak (we are at 174 now, the end-of-month peak was about 199 in August 2000)

Here are some real rates of return for the inflation-adjusted S&P500 total return index:

I would have to say for a long-term investor, the previous ten years looks pretty good. If you had put your money into the broad stock market when Greenspan talked about irrational exuberance, you'd be up about 75% or so in real terms. (assuming reinvestment of dividends)

01:21 PM

Financial markets

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Tracked on March 29, 2007 08:25 AM

A key assumption being, of course, that the inflation measure used (CPI?) represents the reality of inflation in some meaningful way.

A major BW article on the measurement of inflation, and the accuracy or lack thereof of the current measurements, would be a good thing.

Posted by: david foster at March 19, 2007 05:33 PM

Oy. I've been writing about the measurement and mismeasurement of inflation forever. I had a cover story back in November, 1994 entitled "The Real Truth About the Economy"

(http://www.businessweek.com/1998/35/z3397011.htm)

which talked about the bad CPI numbers.

Posted by: Mike Mandel at March 19, 2007 06:03 PM

Thanks. So what inflation indicator did you use for the chart above?

Posted by: david foster at March 20, 2007 09:59 AM

what's the real muni bond chart look like?

Posted by: bill pitcher at March 20, 2007 04:12 PM

I believe the CPI is UNDERestimated. The argument that it doesn't take into account "improvement of goods" is sort of a red herring. If I need a car to get from point A to point B, then I have to pay what a car costs today regardless of how much nicer a 2007 Subaru is than a 1973 Chrysler. It isn't as though I can buy a car of 1973-quality and pay what it is currently worth; I have to pay $25,000 for a "transportation unit". Maybe that 2007 Subaru improves my quality-of-life - go ahead and adjust for improvements in a QOL index - but as far as inflation goes, the price has gone up 1,250% ($2000 to $25000) for a "unit of transportation".

Posted by: Brandon W at March 22, 2007 11:15 AM

My problem with this sort of chart is that it doesn't take into account taxes on dividends, which over the course of this chart have had some punitively high rates, especially for the higher tax brackets.

Posted by: happyjuggler0 at March 24, 2007 10:28 PM

David--Just the straight CPI.

Brandon--The real issue comes with the introduction of new goods and services, i.e. the iPod or a minivan.

happyjuggler--no disagreement there. If you have your money in a 401K, though, you do get the full benefit of these gains.

Posted by: Mike Mandel at March 26, 2007 08:48 AM

That was really helpful, thanks!

Posted by: speedmaster at April 1, 2007 03:11 PM

An interesting article on inflation:

http://mises.org/story/2525

Posted by: Brandon W at April 3, 2007 08:35 AM

sure TODAY it looks OK; but for any of the nearly 8 years after Dec '06 it looked, in real terms, worthless. . . kind of a problem when those 8 years represent 10% of an entire avg life expectancy. . . maybe too difficult an interpretation for an Econ PhD? or was it an ideological propaganda PhD? :)

Posted by: nivek_yoccm at April 25, 2007 04:58 PM

by the way, thanks for the chart---don't see this layout nearly enough

Posted by: nivek_yoccm at April 25, 2007 05:00 PM


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