The stock market is up this week, with the S&P 500 closing at 1221, the highest it has been since the Collapse of 2008. Simultaneously, the Federal Reserve has announced plans to buy U.S. Treasury bonds (i.e., print money). Before we look at the nominal dollar figure and get excited about how well we’re doing, let’s look at the S&P 500 in euro:
- January 1, 1999, the date the euro started trading: S&P 500 at 1229, euro worth $1.18, so the stocks were worth 1042 euro
- November 4, 2010: S&P 1221, euro worth $1.42, same stocks worth about 859 euro
Valued in dollars, U.S. stocks have been flat over the 12-year period. Adjusted for inflation, they’ve fallen by 31 percent.
Valued in euro, they are down 17.5 percent. I haven’t found an authoritative euro inflation calculator, but it looks as though they’ve had a similar inflation rate to the U.S. So adjusted for inflation, an investor has lost about 42 percent in euro spending power.
The Federal Reserve has the ability to make us all billionaires. We’ll feel great about our new wealth until we step out of a plane in Paris and discover that USD$1 billion is also the price of a Diet Coke at Roissy.
[I am feeling slightly bullish on the stock market after the election. With opposing parties in control of various parts of the lawmaking process, there is a potential for gridlock. Our existing system of crony capitalism may not be ideal, but it is well understood by American businesses. They will very likely be more confident investing in the U.S. with some assurance that the legal and regulatory environment will be stable. If companies could be guaranteed that no laws would change for the next two years, that will be a far friendlier environment than having to adjust to dramatic new legislation that may intentionally or inadvertently favor competitors. If nothing else, the end of the election will give a boost to aviation businesses nationwide because Barack Obama won’t be flying out to Democratic fundraisers every day and shutting down 3000 square miles of airspace centered on wherever he happens to be. If Obama is at his desk in Washington working with the Republicans, it means that we flight instructors will get a chance to work as well!]
Eurostat is the official source for EU and Eurozone statistics.
Well, if you choose the peak of an undisputed bubble in the market as the starting point, it’s not surprising that you see a real drop in value.
Additionally, the value of the S&P does not equate to real GDP growth per capita. Which is a legitimate (if flawed) measure of a country’s economic well being.
M.B.: thanks!
thepolemarch: The peak was January 1, 1999? I picked that date because it was the inception of the euro and no value for the euro was established prior. As far as I can tell from a quick Googling, the 1229 value on January 1, 1999 was not any sort of peak. My search revealed that March 24, 2000 was the peak, with the S&P closing at 1,527.46, with an intra-day high of 1,553.11. An investor unlucky enough to have bought in the middle of the day, March 24, 2000, would have suffered a 21.3 percent nominal dollar loss over the 10.5 years since then. His inflation-adjusted losses would be higher, of course.
Phil,
Yahoo finance (start at finance.yahoo.com) displays chart history for stocks and indexes including S&P, with varying time scales. In early October 2007, the S&P 500 closed at 1,561.80.
You have a point, there, Philip, about gridlock. There’s been a debate going in for the past year or so regarding the reason that corporate America is sitting on vast quantities of dollars instead of spending that money on R & D, new factories, etc. Some say that the issue is their uncertainty about what changes to the rules of the game might come out of DC. Others say that they’re not investing due to a concern that they won’t be able to be able to sell whatever new products they put on the market due to weak demand, i.e. the recession.
So now comes the oppurtunity to resolve that debate. If we start reading in the news about the Fortune 500 commiting to large investments in the US, the uncertainty theory will be proved to be correct.
Now that CEOs can no longer justify their lack of hiring by claiming uncertainty about the socialist damage liberals might inflict on the economy, will they start spending their horded cash on job creation? If not, will they blame the continued pernicious liberal control of the House and the White House?
Also, would you complain just as much if the campaign junkets of a putative President McCain (or Palin) were grounding flight instructors?
Just curious.
Ted: If you search for “George W. Bush” in the search engine here, you’ll find a raft of flattering postings such as http://philip.greenspun.com/blog/2003/05/02/when-57-million-of-weapons-isnt-enough-protection/ and http://philip.greenspun.com/blog/2005/05/15/the-cessna-flying-over-downtown-washington-dc/; If McCain and Palin had been elected, as you suggest, we would have been delighted to shut down our business and spend the following eight years celebrating their wise governance.
Your idea that CEOs must “justify” their lack of hiring makes sense only in a planned economy. In a free market economy, a company would hire additional workers when it was unable to meet demand with the existing staff. And then it would hire the best quality workers that it could find at a given price. There would be no need to “justify” the decision not to hire a particular worker other than “we can’t figure out how to make a profit by hiring that guy”. In a Soviet-style system I think you could argue that companies must exist to serve the Proletariat. But in the U.S.’s mix of central planning, free market, and crony capitalism, I don’t think it is obvious that GE owes us average citizens anything.