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 Lundy@StaffordTrading.com, or (404) 488-6953.
GDP Data : http://www.multpl.com/us-gdp-infation-adjusted/table
CPI Data : http://www.bls.gov/schedule/archives/cpi_nr.htm#1997
Debt Data : http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo4.htm
Debt Data : http://www.usdebtclock.org/
Money Supply Data : http://www.data360.org/dsg.aspx?Data_Set_Group_Id=2052&count=500