UnThreaded | Threaded | Whole Thread (1) | Ignore Thread Prev Thread | Prev | Next | Next Thread
Author: globalist2013 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35397  
Subject: Regaining A Prior Market High? Date: 4/13/2013 9:16 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 3
This past Wednesday, 04/09/2013, the intra-day high for SP500 index (1,589) was finally higher than its intra-day high (1,576) of five and a half years ago on 10/11/2007.

But should anyone be celebrating?

Typically, stock returns are estimated using three factors: company earnings, dividends, and inflation. But on more than one occasion, market vanes such as Bogle and Buffet have both estimated that in the coming decade the forward return rate for stocks will be no more than 8%. Let’s make the counter-factual assumption that current stock prices should have discounted inflation and they aren’t not merely an intended effect of the Fed’s free money policies. At a realistic inflation rate of 5% to 6% (and not the lie reported by the BLS), where would the SP500 index have to be trading today? Something around 2,116, right? or a third higher than its present value. But by the time the SP500 gets there, if it ever does, it will have fallen behind inflation again.

So, yes, the nominal stock numbers are higher, and everyone is feeling the “wealth effect” that Bernanke intends. But how many investors can report that they have increased their purchasing-power during the past five and a half years on an after-taxes, after-inflation basis? That is the only number that matters. “Did your investing efforts create the cash flows by which you can now buy more goods and services than you could before?” Or have the past five and a half years been merely a game of trying to catch up to where you once where?

I strongly suspect that most investors (stock, bond, or otherwise) will report the latter. The late '90's bubble produced a chimera of wealth that the '00-03 correction unwound. The '03-'07 rally created another asset-price bubble that the '08-'09 correction unwound. The '10-'13 rally is producing another securities price bubble that the next correction will unwind. Meanwhile, is anyone truly getting ahead of the game in the sense that they can honestly and accurately report that their purchasing-power has been increased though their investing efforts alone? All of us are handling a lot more money than we used to. But how much does that money really buy?

Charlie
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (1) | Ignore Thread Prev Thread | Prev | Next | Next Thread

Announcements

Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Post of the Day:
Dividend Growth Investing

Good Time for Dividend Champions?
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement