Stock Market Datapoint of the Day

Dean Baker:

Investors in stock have not done very well over the last decade. The S&P 500 rose by a cumulative total of 52.6 percent from December 1997 to December 2007. After adjusting for inflation, the increase was 17.3 percent, which translates into real growth of just 1.6 percent a year. Add in a dividend yield of approximately the same size and we get that the average real return on stocks over the last decade has been 3.2 percent, a bit lower than the yield available on inflation indexed government bonds at the time.

If the absolute return on stocks is lower than the absolute return on TIPS, then the risk-adjusted return on stocks has surely been much lower. I have to admit that this result surprises me, because (a) although there were signs of irrational exuberance at the end of 1997, the greatest excesses of the dot-com bubble had yet to materialize; and (b) one would think that the multinational companies which comprise the S&P 500 would naturally have risen quite a lot in value as the dollar declined, thanks to their international income.

Of course with hindsight the best investment at the end of 1997 was undoubtedly real estate.

This entry was posted in stocks. Bookmark the permalink.