negative growth (inflation adjusted basis) stock market

[Fresh_Start]

under Bush and the fiscally responsible GOP.

[PDJane]

1. Obviously,

I missed that fiscally responsible part.

[Fresh_Start]

8. me too

eom

[Sammy Pepys]

2. Just like my math teacher used to say...

"Please show your work."

[ProfessorGAC]

3. I Am Not Going To Go Over Every Equation, But. . .

. . .the economy is not based strictly on GDP growth. The indexing that would be done through modeling would indicate the growth as being unsustainable and arbitrarily positive due to the shift from consumption to gov't spending as well as the fraction of consumption with too high a fraction of debt. The combination of gov't and private debt is a long range economic drag as it causes monetary inflation, which is a leading factor in price inflation.

The weak increase of median household income v. inflation reduces the buying power of the middle 90% of income earners, which is the primary lever of consumption.

So, this economy is a illusion based upon the convenient examination of the numbers they like, and the ignoring of medium and long range factors that indicate the opposite. And, the latter are more abundant and exert greater leverage on the factors they do like.
The Professor

[Sammy Pepys]

5. But how do we adjust the stock market for inflation...

...to show negative growth, as the OP stated. That's what I'm really interested in.

[cgrindley]

4. I'll do it for him

The Dow

January 14, 2000: 11722
February 27, 2007: 12216

That's a gain of 494 points in 7 years.

11722 year 2000 dollars are now worth 13725 dollars due to inflation. The Dow has therefore lost approximately 1509 dollars when adjusted for inflation.

On January 14, 2000, 1 Euro cost 1.02 USD. If you had spent 11722 USD on Euros you would have been able to buy 11432.5 Euros. If you had put those Euros in a sack under your mattress, they'd be worth 15062.70 USD.

That's right, you would have been better off keeping a sack of Euros under your bed for 7 years.


PS yeah yeah that doesn't take into consideration any dividends you may have earned... but I couldn't find total dividend yield for the DOW for that time span...

[Fresh_Start]

7. thanks for pulling that together

I knows its true but I would have had to locate the inflation information

[Sammy Pepys]

9. The DJIA index average and dollars do not correlate that way

"The Dow has therefore lost approximately 1509 dollars when adjusted for inflation."

You can't just take points and make them into dollars to find an inflation figure. That's not the way the DJIA is calculated.

[cgrindley]

11. Of course it does

You're telling me that 11722 dollars in the year 2000 didn't cost 11722 dollars in the year 2000?

You're disputing applying an inflation calculator to 11722 year 2000 dollars to get their value at the end of 2006?

Why are you attempting to defend the stock market?

[Sammy Pepys]

12. You are taking the point level of an index...

...and trying to turn it into a raw dollar figure. But that's not how they're calculated. You can't turn a DJIA level of 11,722 into $11,722 and draw an inflation figure from that...it doesn't work that way. It's an index based on the prices of the stocks comprising it (in the case of the DJIA, 30), price-weighted and applied against a diviser to account for splits.

If you really want to devise a theoretical index average based on inflation, you have to adjust all of the stock prices in that index for inflation, price-weight them accordingly and then use the divisor (whether you'd use the current diviser or the one from the year you're comparing I'm really not sure...but divisors do change) to calculate a new average. You can't just pull the average and throw a dollar sign on it.

Another way to look at it: there are lots of indexes out there: S&P 500, NASDAQ, Russell. I'll bet you dollars to donuts that if you tried the same math with their averages to derive an inflationary rate, they wouldn't match.

Even with all this fun math though, you still probably won't get an accurate picture of actual returns versus inflation. I'd also wager that if you annualized said returns over five years, the stock market would likely have beaten the inflation rate.

[cgrindley]

13. Absolutely I can

If I wanted to purchase one share from each of the listed stocks used to calculate the DOW it would cost me the point value (ignoring the commissions). How much money would I have spent on January 2000? 11722.

Now repeat the process today. How much money would it cost today?

We're not hanging on to the shares. We're not tracking dividends or splits. We're not even tracking stocks that got delisted or replaced. We're simply looking at the price of the shares at two moments in time.


The reason why you wouldn't be able to derive an inflationary rate from the indices themselves is that they exist in fairyland.

[Sammy Pepys]

14. Nope

If I wanted to purchase one share from each of the listed stocks used to calculate the DOW it would cost me the point value (ignoring the commissions). How much money would I have spent on January 2000? 11722.

You better check your math.

[cgrindley]

15. The DOW was 11722 in January 2000

are you claiming that it wasn't?

[Sammy Pepys]

16. That's not what I'm contesting you on...

You said this:

If I wanted to purchase one share from each of the listed stocks used to calculate the DOW it would cost me the point value (ignoring the commissions). How much money would I have spent on January 2000? 11722.

You would have not paid anything close to $11,722 for one share each of all 30 DJIA components at any point in January 2000, just as you would not pay approx 12,000 for one share of all 30 if you bought them all right now. The DJIA has never been calculated by simply taking the sum of all the share prices in the index (I don't think there is any index out there that does that). So there is a big problem with your hypothesis.

[havocmom]

10. Someone ( an old school Republican, actually) sent me this re investments:

Subject: Retirement Planning


If you had purchased $1000.00 of Nortel stock one year ago, it would now be
worth $49.00.

With Enron, you would have had $16.50 left of the original $1,000.00.

With WorldCom, you would have had less than $5.00 left.

But, if you had purchased $1,000.00 worth of beer one year ago, drank all
the beer, then turned in the cans for the aluminum recycling REFUND, You
would have had $214.00.

Based on the above, the best current investment advice is to drink heavily
and recycle.

It's called the 401-Keg Plan

[MilesColtrane]

6. chart

http://www.dogsofthedow.com/dow1925cpilog.htm