S&P 500 / Consumer Price Index

Benchmarking stock returns against inflation

Here’s a cool chart with a long history:

The idea here is that you take the S&P 500 and measure it against inflation. This helps reduce some of the nominal growth seen in the stock market over time, which makes the index a little more interesting over the long history. For example, the 1920s stock market bubble and following Great Depression are actually noticeable here, whereas on a regular chart of the S&P 500 you barely see the trend budge that far back.

What makes this time series interesting as well is that it shows how well the stock market works as a hedge against inflation. If the ratio is going down, that means inflation is increasing faster than stocks. This happens most noticeably when the market crashes or during the period of insane inflation in the 70s and 80s or even in the decade following the dot-com bubble.

Despite the setbacks, the market has always found a way to outpace inflation and grind higher…eventually. Though, it’s not always a very direct route. So, don’t ask me what the next ten years are going to look like!