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Inflation adjusted S&P500


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It occurred to me that everybody is really looking at wrong numbers all the time, by not adjusting for inflation. People KNOW about inflation, but don't mentally adjust every number for it.

 

For example with earnings coming up, company X growing sales by 10% yoy does not really mean much, if (real) inflation is already around 10%.

 

Or compare this chart, a more or less smooth ride since 1940, right?
 

image.png.a96c91141ae16e8e3e36fc9f09d6f3b0.png

https://www.multpl.com/s-p-500-historical-prices
 

To this one:

 

image.png.d2abbadb1c3d0c1103a575fc1018bf11.png

https://www.multpl.com/inflation-adjusted-s-p-500

The inflation adjusted chart shows just how excrutiating the period from 1968 to 1982 was, which was nominally just a sideways market. It does not included dividends however, which softened the loss of purchasing power somewhat I suppose.

 

And the current bear market is already down close to 30%, once you factor in inflation.

 

Sorry if this was obvious to people here...

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2 hours ago, backtothebeach said:

It occurred to me that everybody is really looking at wrong numbers all the time, by not adjusting for inflation. People KNOW about inflation, but don't mentally adjust every number for it.

 

For example with earnings coming up, company X growing sales by 10% yoy does not really mean much, if (real) inflation is already around 10%.

 

Or compare this chart, a more or less smooth ride since 1940, right?
 

image.png.a96c91141ae16e8e3e36fc9f09d6f3b0.png

https://www.multpl.com/s-p-500-historical-prices
 

To this one:

 

image.png.d2abbadb1c3d0c1103a575fc1018bf11.png

https://www.multpl.com/inflation-adjusted-s-p-500

 

The inflation adjusted chart shows just how excrutiating the period from 1968 to 1982 was, which was nominally just a sideways market. It does not included dividends however, which softened the loss of purchasing power somewhat I suppose.

 

And the current bear market is already down close to 30%, once you factor in inflation.

 

Sorry if this was obvious to people here...

It would be nice to combine the S&P500 TR chart with inflation data to get the inflation adjusted S&P500 TR; I may do that when I got the time.

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Posted (edited)
3 hours ago, backtothebeach said:

It occurred to me that everybody is really looking at wrong numbers all the time, by not adjusting for inflation. People KNOW about inflation, but don't mentally adjust every number for it.

 

For example with earnings coming up, company X growing sales by 10% yoy does not really mean much, if (real) inflation is already around 10%.

 

Or compare this chart, a more or less smooth ride since 1940, right?
 

image.png.a96c91141ae16e8e3e36fc9f09d6f3b0.png

https://www.multpl.com/s-p-500-historical-prices
 

To this one:

 

image.png.d2abbadb1c3d0c1103a575fc1018bf11.png

https://www.multpl.com/inflation-adjusted-s-p-500

 

The inflation adjusted chart shows just how excrutiating the period from 1968 to 1982 was, which was nominally just a sideways market. It does not included dividends however, which softened the loss of purchasing power somewhat I suppose.

 

And the current bear market is already down close to 30%, once you factor in inflation.

 

Sorry if this was obvious to people here...


@backtothebeach you make a great point. And one that i struggle with. What is the proper way to look at historical data/information when trying to value assets today and into the future in a high inflation environment? Investors have been working in a falling/low inflation environment for +40 years so have not had to think much about this.
 

I like to look at 5 year stock price charts to get a quick idea of how a cheap a stock is trading (i.e. i love it when i see profitable and well run companies trading at or near a 5 year low). Obviously doesn’t mean i buy them… but it often helps identify opportunities. And when buying real estate, looking at historical prices is important. Yes, there are lots of other important things to consider when buying assets. But how useful is historical information in a high inflation environment that runs for years?
 

A real life example: i starting to look for a 2 bedroom unit in a popular part of Vancouver (Kits). These units average about 850 sq ft and cost about C$850,000. Now if inflation is running at 8% for a year and prices stay at $850,000 does this mean the unit a year later is now really worth about $780,000 (in inflation adjusted money)? And if inflation runs 6% in year 2 does this mean the units is now worth $735,000? Meanwhile i am waiting for a 10% correction in nominal prices… which might never come. Now if inflation was running at zero and 2 years later that $850,000 unit was selling for $735,000 i likely would be running to buy it. (For real estate in Vancouver WE KNOW cost to build is going up at least at the rate of inflation. We also know rent is going up at rate of inflation - especially in Kits). 
 

And if nominal prices actually come down 10 or 15% is that not a beautiful thing in a high inflation world for people looking to buy assets? (Falling nominal prices is NOT a good thing for asset owners in a high inflation world.)

Edited by Viking
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17 hours ago, randomep said:

It would be nice to combine the S&P500 TR chart with inflation data to get the inflation adjusted S&P500 TR; I may do that when I got the time.


I found a nice site that calculates the S&P500 inflation adjusted total return:

https://dqydj.com/sp-500-return-calculator/

Taking all the years when inflation was above 5%, January 1969 to January 1983, nominally the S&P 500 gained 2.5% annualized without dividends, and 6.9% with dividends.

 

However the Inflation adjusted total return with reinvesting all dividends was -0.5% annualized, barely preserving purchasing power. (Well, and then there is taxes on dividends…)

 

 

7CD35123-04B1-4D5B-AADA-4548DD043A70.thumb.png.60689361c0193a665d190bd9991ad05e.png

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20x in like 150 years seems rather slowish. I mean its all great from a detached pov but if you somehow live or seek to live off wealth it has to happen faster I think. More like Microsoft from mid 80s to today. That's why growth is always prized. I never believed in value stocks even under high inflation, of course a high growing value stock is the gold mine if it can be found.

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