By Lundy Stafford Hill

August 26, 2014.  This has been a historic week in the investing world.  CNBC and all the market mavens are abuzz with the S&P 500 hitting the 2000 level for the first time ever.

It is cited that the S&Ps first crossed 1000 in 1998, sixteen years to double.

In referring to the continuous contract of the Emini S&P contract, it grew from 979.25 on January 1, 1998 to 1998.75 on August 26, 2014.  An overall return of 104%.  This computes to an annualized return of 4.56%.

Let’s compare the overall stock market performance to some other measures.


In 1998, GDP was $11.2 trillion.  It is now $16 trillion.  An increase of 43%.  An annualized return of only 2.25%.  So, the stock market grew at twice the rate of the economy.

US government debt grew from $5.5 trillion to $17.5 trillion.  An overall growth of over 200%.  This equates to an annualized rate of 7.5%.

Now let’s look at some measures of direct inflation : Consumer Price Index (CPI) and M2, a measure of money available.

CPI grew from a level of 161 in 1998 to 238 now.  That is a rise of almost 50%.  Or, 2.47% annualized.

Subtract this from the stock market annualized return of 4.56%, yields a REAL return on stocks of just over 2% per year.

CPI is a measure of prices.  Milton Friedman famously stated “Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.”

I read that to mean that true inflation is a measure of the amount of money (growth) MINUS the output of the economy.  M2, increased over 180% in the time that it took the S&P market to double.  This is an annualized growth in M2 of 6.72%.  This, while GDP only increased at an annualized rate of 2.25%.

Subtracting GDP growth of 2.25% from M2 growth of 6.72% yields 4.47%.  Is this the REAL measure of inflation?  If so, it is twice what the government tells us inflation is.

So, subtracting this from annualized S&P growth yields REAL annualized S&P growth of only 0.09%.  With this real annualized return, I show the value of the S&Ps to be basically flat for the last 16 years.

Lundy Hill is a 20+ year futures trading veteran.  Leaving a position as software engineer working for NASA on the space shuttle, he joined his father in the more turbulent arena of trading.  Earning his wings as a local in the bond pit, Lundy has since left Chicago and runs a brokerage and a trading company.  He can be reached at, or (404) 488-6953.


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