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is the dow cheap or overpriced now?

25/11/2017

2 Comments

 
Is it a good idea to adjust stock market indices to inflation? Well, why not. However, there's a glitch. The most usual inflation measure -- the Consumer Price Index -- is an awkward tool for this purpose. Asset prices should not be conflated with consumer prices. Equities are assets, consumer goods are not. 

Discounting asset prices with the CPI is methodologically wrong. Do not expect any meaningful results if you combine the CPI inflation with equity prices, corporate earnings et cetera.

Is there a better approach? Yes. Using monetary inflation -- or money supply growth -- is the correct way to go. In other words, the question is "how would the stock market index look like if money supply remained constant?" 
(It's money supply, not consumer prices what matters to investors.)


The answer to the above question is as follows -- and it's a surprising chart indeed!
Picture
The takeaway of this exercise is, among others:
  • The 1929 bubble was a huge event, something that was never heard of before or after 1929.
  • During the post-war period, reversion to the mean is clearly visible.
  • Interestingly, the present-day monetary-inflation-discounted value of the Dow is pretty much in line with the long-term normal. No bubble, to be specific.
  • The 2000 bubble was very similar to that of 1937, with the aftermath being alike, too.
  • The best years to buy cheap stocks were 1933, 1984, and 2009. 
If you look at the stock market through the inflation-adjusted optics, your perception of reality will never be the same as before. As if your doctor prescribed you the right glasses to correct your impaired vision.

2 Comments
college essay writing service reviews link
2/11/2018 07:19:30 am

One of the main causes of inflation is the increase of consumer demand. When consumers demand for more and more products to be sold in the market, a problem in the market supply begins to exist. Not all the time the sellers will be able to supply the amount of demand that the people are requesting. When this happens, shortage of product supply occurs. Products will then be priced higher because many people will still buy it since they are the ones in need of those product/s.

Reply
stocktrim.com link
21/11/2019 05:50:42 am

More investment calculator overpriced flow and discounting the assets for stock marketing techniques and equity prices. The growth of supply and sharing the pricing remained the great topics.

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    Pavel Kohout (1967), investor, writer, photographer and application developer (Android, Windows, macOS). Based in London and Prague.

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  • HOME
    • INTRODUCTION
    • THE DASHBOARD
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  • ABOUT
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    • ÚVOD
    • PŘÍSTROJOVÁ DESKA
    • RELEASE 2
    • ČTENÍ
    • OBCHOD
    • CZ BLOG
    • KNIHA