The evolution of the stock market in the long term, and inflation

(Published in bolseando2 in Spanish in April 2010)

At have interesting graphics of long term on the S&P 500.

Let's look at the following graph indicating the evolution of the SP500 from 1870 until 2010, both in nominal value (the one that shows the index that all people can found in many websites) and in value “real”, i.e. discounting inflation, and also gives us the graphics corresponding to the value “total”, i.e. taking into account dividends received throughout those years and assuming that we reinvest them.

All are interesting, but look at the one in which I've added a regression line.

It is the “real total return”, i.e. the graphic marking the increase of the stock market taking into account dividends and granted the inflation.
We can see that from 1870 until 2010 the line rises from about 4.5 to about 45000, If the year will end on the regression line. This implies that a dollar of purchasing power invested in stock market in 1870 It would now become shares by value of 10000 current PPP $. A great result for the stock market that can encourage to invest in stock market in the long term, thinking in grandchildren and great grandchildren.

With a small mathematical calculation have this represents an annual growth rate of a 6.8 %, but bear in mind that this is a discounted inflation graph, then we can conclude that the stock market rises in the long term 6.5 % more than inflation, consistently, but with large swings, as it is quite often both assert twice as a half of the value corresponding to the regression line.

At this time (April 2010) the SP is located approximately at 25 % below the regression line.

Place your bets!

[Via: bolseando2 stock exchange and inflation]