Looking at the S&P500 (Relatively)

Last week, we looked at the question Which is Performing Better, the Dow or the S&P500 ?

A significant difference between the two indexes is how they are computed — the Dow is price-weighted, while the S&P500 is market cap-weighted.

The higher priced Dow stocks (Boeing, United Technology, Catepillar, 3M) have a disproportionate impact on that index. On the SPX, the biggest cap stocks — Exxon Mobbil, GE, Citigroup, Microsoft, AT&T — are (literally) the heavyweights. GE and Microsoft, at about $37 and $30 respectively, have only a modest impact on the price-weighted Dow. Yet on the cap-weighted SPX, the $382.2 and $292.4 billion dollar respective caps have an enormous impact.

That was last week. This week, Floyd Norris takes a different tack: looking at the SPX in various weighs based on different measures:

"It has taken 88 months, or nearly three-quarters of the decade, but the American stock market is finally back to where it ended the last decade.

At least that is true if one measures stock performance in the traditional way, using dollars. As the chart accompanying this column indicates, the Standard & Poor’s index of 500 stocks ended April a full 1.1 percent above its level of Dec. 31, 1999.

Unfortunately for those who owned American stocks during that period, the dollar itself has not been a star performer. As a store of value, the buck is having a bad decade.

The charts show how the S.& P. has performed against some other currencies, and against some alternative investments:"

Charts are below:


click for larger chart


Charts courtesy of NYT


Against the Japanese yen, S&P500 is up 18 percent during this decade. But in British pounds, its down 22%. Even worse, in Euros, the SPX lost a third of its value.

The impact of inflation on commodity prices is even more stark: Compare what a unit of S&P500 bought at the end of 1999 versus today. The S&P500 index buys only 58% as much corn, only 57% as much house (based on the Case-Shiller index) as it used to, only 40% as much Oil, and only 32% as much gold as it did in 1999.

This isn’t to suggest that the Index has moved up over the past few years; it obviously has. But it also reveals two fascinating factors: Iy shows how important relative performance of any asset class is; and secondly, it demonstrates how pernicious the effect of inflation has been. No wonder its called the cruelest tax.


A Comeback for the S.&P. (If the Yardstick Is Dollars)
NYT, May 5, 2007

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What's been said:

Discussions found on the web:
  1. SJ commented on May 7

    Doesn’t this stuff really just show that the US currency has been devalued against everything that isn’t artificially pegged to it? Wages: steady. Prices of Chinese imports: steady.

    I mean, you call it inflation, but it’s a bit different to the earlier episodes.

  2. dan commented on May 7

    Barry, does this analysis suggest that the excess valuation of equities was erased during the past seven years? Perhaps this is a key reason why US equities continue shrug off any negative news – along with low interest rates, better than expected cash flow growth, and ongoing takeover activity from both strategic and financial buyers.

  3. Nova Law commented on May 7

    Why stop at corn, gold, or Euros?

    The S&P 500 has skyrocketed when priced in clothing, in laptop computers, and in term life insurance, as prices for all three of those commodities have plummeted over the past 88 months.

    I am sure there are many other products or items in which the S&P could be priced. Such comparisons of what the S&P has done compared to non-dollars will become important only when my bank requires me to pay my mortgage in Euros or corn.


    BR: Because Gold, Oil, Corn, Pounds, Euros, etc. are all investable asset classes.

    Laptops, clothes, term life insurance, etc, are not.

    The key point is not that the rally was a mirage, but rather that returns are relative.

  4. WW commented on May 7

    >>Such comparisons of what the S&P has done compared to non-dollars will become important only when my bank requires me to pay my mortgage in Euros or corn.

    But what happens if we have to pay for gas in Euros? The US is not an island anymore.

  5. Greg0658 commented on May 7

    Nova might be on to some super computer trade picker program.

    Above chart scheme in every product bar code. Weighted by import/export and if its a daily, weekly, monthly or occassional purchase.

    I wonder what health care insurance looks like? And is term life insurance flat to just negative? (in dollars for me)

  6. Fred commented on May 7

    With respect, this is data mining again. If you looked at a longer term look at these charts, you would draw a different conclusion. You are looking at a rare period of dislocation, due to a crash hang over, 2 wars, massive storm costs (in energy, etc).

    Looking AHEAD seems more profitable to me. On that front, Ed Yardeni says that by year end the 12 month forward earnings will be $104 for the S&P 500. You can plug in whatever PE seems fair to you and come up with the possibile levels for the market.

  7. fatMary commented on May 7

    Goldman’s Cohen Raises S&P 500 Forecast to 1600, Dow to 14,000

    By Nick Baker

    May 7 (Bloomberg) — Goldman Sachs Group Inc. chief investment strategist Abby Joseph Cohen increased her forecasts for the Standard & Poor’s 500 Index and Dow Jones Industrial Average to 1600 and 14,000, respectively, by the end of the year.

    The S&P 500 closed on May 4 at 1505.62, the highest since September 2000. Cohen’s new estimate implies a 6.3 percent advance from the current level. The Dow, which finished at a record 13,264.62 last week, would have to rally 5.5 percent to meet Cohen’s projection.

    Cohen, based in New York, previously forecast the S&P 500 and Dow to rise to 1550 and 13,500 by Dec. 31. On average, 14 Wall Street strategists tracked by Bloomberg see the indexes reaching 13,688 and 1548, according to an April 30 survey.

    Cohen also raised her 2007 forecast for total earnings from S&P 500 members to $94 a share from $93, and introduced a 2008 estimate of $100.

    Get on the Love Train!

  8. WilliamRahal commented on May 7

    Great charts!
    I did some work showing how every time last century, surges in commodity prices led to a two-third contraction in P/E.
    See “Financial vs Tangible Assets”
    at wrahal.blogspot.com (April archives)

  9. tomorrowisforever commented on May 7

    On a related note, I think I am suffering from cargo-cult syndrome. Hear that, AJ Cohen? I figure just buy a stock or index fund and watch it go up. No hard work here anymore. Avoid third-rail companies like Ford and GM and sit back and enjoy the paper gains. Can I get a witness?

  10. Fred commented on May 7

    “The key point is not that the rally was a mirage, but rather that returns are relative.”

    Absoultely correct Barry, but what happens to that “relative” return if you lengthen those charts back to a starting point of the mid 90’s? Quite a bit different, no?

  11. Winston Munn commented on May 7

    “I mean, you call it inflation, but it’s a bit different to the earlier episodes.”

    The Austrian school would disagree – they argue that inflation is debasement of money and its cause is always the same. How this debasement presents itself may change from one time period to another, but that does not mean the forces at work are any different.

  12. grodge commented on May 7

    If the market is the least bit efficient, which granted may be a big assumption, but doesn’t this mean that the SPX is cheap compared to all these other asset classes?

    If one has capital to put to work, say your retirement fund, then wouldn’t the SPX be a better choice right now than the relatively expensive other assets: house, gold, euro or pound-denominated stocks, etc?

    This capital has to flow somewhere, so why not the SPX? Liquidity will seek the lowest level, and the SPX seems to be that asset class, no?

  13. Fred commented on May 7


  14. brian commented on May 7

    Well grodge and fred would you admit that from the investment choices shown that except for the yen keeping your money in US equities was a lousy choice? The housing bull run is over, but what about currencies and commodities? Do you see a goverment policy change that will actually cause the SPX to seem cheap compared to other asset classes? That’s the reason not to look at the charts before 2000, it all has to do with the current administration and policies.

  15. TexasHippie commented on May 7

    tomorrowisforever – nice Feynman reference there! Here’s a link for those who haven’t read his essay:


    Also I wonder how this ties into Grantham’s global-bubble theory. If all asset classes are inflated, then their relative gains are nil? If recent gains are muted by weakened purchasing power does Grantham believe that a global correction will be a mean-reversion in all respects? If purchasing power is kept intact during a correction this implies deflation to a degree as the dollar regains its strength.

    I don’t know where to start picking apart this interlocked puzzle….

  16. LB commented on May 7

    Very interesting… I was trying to do something very similar; idea was to calculate the price of crude oil in these currencies. I don’t think people in Europe are seeing that the increase in oil prices as we do in US (in relative terms). Same will be true for other commodities also.

  17. Winston Munn commented on May 7

    “This capital has to flow somewhere, so why not the SPX? Liquidity will seek the lowest level, and the SPX seems to be that asset class, no?”

    The risk is that this capital/liquidity could also disappear back into the black hole from whence it eminated, and virtually overnight. This liquidity is based on leverage multipled by leverage cubed, at minimum. All it would take is a crisis to start the great unwind. The startling realization is that the instigators of the deals have no reason to care one way or the other, as they have taken their immense slice off the top and have no further risks.

    Compound that risk with threatened, implied, and real reductions in FCBs accumulation of treasury bonds, and you have a lighted fuse of a massive blowup – less bond demand=lower bond prices=higher yields – the only question is how long will the fuse burn before it ignites the dynamite.

  18. Fred commented on May 7


    You’re missing my point…that the dollar rallied from these levels ~ 1994 to the peak of the bubble, based on the fact that the emerging economies had huge inflation, bad policies, and ultimately devalued into a crisis of confidence. Then as the bubble unwound, oil rallied (helping fix thier economies) FX investors sold the US dollar, back to where it was before. So in that sense the currency rally and fall washed each other out — an economic non-event.

  19. brian commented on May 7

    And where are the indications that the current trend of a weak dollar and strong commodities will stop, which would mean SPX could continue underperforming other asset classes as it has the last seven years? Is the Fed going to save the dollar by raising rates, and consequently batter housing even further?

  20. Fred commented on May 7

    It’s called long term SUPPORT….until it’s broken. The fed will be cutting rates.

    Foreign investors will continue to buy cheap US securities through the cheap dollar. Buy low, sell high (buy fear, sell greed)

  21. grodge commented on May 7

    I fully understand the debt-crisis theory bandied about on this and other blogs, and I can see why this is concerning.

    I come at this from a bias that the market is overvalued and due for a correction, or worse. But looking at shorting opportunities, I find it very hard to find any.

    More stocks are beating estimates, earnings estimates are increasing in multiple sectors, PE’s are reasonable, short interest is relatively strong and momentum is positive.

    On the other hand, typical worries exist that mitigate pure optimism, but doesn’t some worry ALWAYS exist? Debt-loads, deflation in housing, high leverage, low stock yields and continued weakening US dollar are all negatives.

    For me, and everyone has to determine their own risk tolerance, the current risk is being out of the market, not in it. I’m conservatively allocated, but net long on stocks.

    I read this blog daily because many of the arguments are compelling, but to sit on the sidelines or sell this run short is odd from a technical standpoint, and odd even from a fundamental standpoint.

    The market may drop, but some have been anticipating the impending 10% correction for the last 25% run. Now it would have to be a 15% correction to justify having sit on the sidelines all this time.

  22. flipper commented on May 8

    dividends, dividends, dividends

  23. Runn3r commented on May 8

    If you were a manager specialising in stocks and stock indexes … why would you be investing in corn or yen or even oil?

    Surely the comparisons that are more pertinent would be between dow/spx and say any of the china stock indices, or the australian all ords.. or german dax or nikkei or the brazilian/argentine stock indices or any other stock index on the global scale?

    Plotting the US stock indices against any of the other global indices would also illustrate capital flight from one index to the other (also from one country to the other) and it would be confirmed by the appropriate currency chart

    e.g. Look at dow vs aussie all ords …and then compare to aud/usd chart …

    Surely this might indicate that what has been happening all along has been global diversification over the last few years but the question begging to be asjed would be who is benefitting from this ..

    At least comparing global stock indices might be more in the oranges vs oranges category rather than the apples vs oranges category

  24. Winston Munn commented on May 8


    I am not “out of the market”, but most definately in “defensive posture”. Large cap longs only, with a couple short plays in selected areas.

    You are right that risk is always inherent in the market, but there are times – rare, of course – when risk trumps reward, when the wall of worry is not about a simple slowdown or even a recession but cirsumstance are such for “the perfect storm” to occur and cause a systemic collapse.

    The present circumstances are best paralleled by the years 1928-1929. The question one must answer for himself is whether an additional 10% return is worth the risk of a 30-40% loss, and how great is the chance for that loss. In other words, is it really different this time?

    For myself, I’d rather take the insurance and wait for the market to declare itself than attempt to guess the outcome. I think we will know within 6-9 months.

    But that is pure speculation and anticipation on my part – meaning opinion, for whatever that’s worth.

  25. Running Dog commented on May 9

    Priced in gold, there is no housing bubble at all.

  26. flipper commented on May 10

    Just a note:

    1. it’s data mining – time period is very short.

    2. if you account for dividends reinvestment the SPX should be 200 point higher during only this period.

  27. flipper commented on May 10

    And some more astonishing fact – in the absense of transaction costs SPX with dividend reinvestment from 1950 is around 9000 now.

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