Following its peak at 1,553.11 in March 2000, the S&P 500 index entered a secular (long-term) bear market, trading in a range between around 750 and 1,550. At the height of the credit bubble in October 2007 the index briefly pushed above the March 2000 peak, but the market quickly reversed and barely paused on its descent to the March 2009 bottom at 666.79.
After essentially traded sideways for 13 years, the S&P 500 finally reached a new all-time high on 28 March this year. Since then, fuelled by a mixture of low interest rates, cheap money and improved corporate earnings the index of the top 500 US companies has continued to push higher.
In nominal terms the S&P 500 is now 1% above its 11 October 2007 high, and 138% above the low it reached in the depths of the financial crisis. In real terms however, i.e. adjusted for inflation, the S&P 500 remains some 7.5% below the October 2007 and 21.8% below the peak it made in March 2000.
A monthly chart of the S&P 500 index: January 1990 to March 2013 (Click on the chart for a larger version)
Source data: Monthly close prices from Yahoo Finance. CPI inflation data from the Federal Reserve Bank of St. Louis.
The chart above shows the S&P 500 index between January 1990 and March 2013. The blue line is the one everyone is use to seeing, as it’s simply the price performance in nominal terms. The red line however, is the real price performance, i.e. the price adjusted for the rate of inflation (CPI).
Over the long-term around 38% of stock market returns are the result of inflation, and since the vast majority of market participants and commentators focus on the nominal price of stocks (and other assets), they cheer as prices rise. What they miss however, is that inflation is actually a destroyer of wealth, not a creator of it.