Looking at the S&P500 (Relatively)

Monday, May 07, 2007 | 05:57 AM

Last week, we looked at the question Which is Performing Better, the Dow or the S&P500 ?

A significant difference between the two indexes is how they are computed -- the Dow is price-weighted, while the S&P500 is market cap-weighted.

The higher priced Dow stocks (Boeing, United Technology, Catepillar, 3M) have a disproportionate impact on that index. On the SPX, the biggest cap stocks -- Exxon Mobbil, GE, Citigroup, Microsoft, AT&T -- are (literally) the heavyweights. GE and Microsoft, at about $37 and $30 respectively, have only a modest impact on the price-weighted Dow. Yet on the cap-weighted SPX, the $382.2 and $292.4 billion dollar respective caps have an enormous impact.

That was last week. This week, Floyd Norris takes a different tack: looking at the SPX in various weighs based on different measures:

"It has taken 88 months, or nearly three-quarters of the decade, but the American stock market is finally back to where it ended the last decade.

At least that is true if one measures stock performance in the traditional way, using dollars. As the chart accompanying this column indicates, the Standard & Poor’s index of 500 stocks ended April a full 1.1 percent above its level of Dec. 31, 1999.

Unfortunately for those who owned American stocks during that period, the dollar itself has not been a star performer. As a store of value, the buck is having a bad decade.

The charts show how the S.& P. has performed against some other currencies, and against some alternative investments:"

Charts are below:


click for larger chart

Charts courtesy of NYT

Against the Japanese yen, S&P500 is up 18 percent during this decade. But in British pounds, its down 22%. Even worse, in Euros, the SPX lost a third of its value.

The impact of inflation on commodity prices is even more stark: Compare what a unit of S&P500 bought at the end of 1999 versus today. The S&P500 index buys only 58% as much corn, only 57% as much house (based on the Case-Shiller index) as it used to, only 40% as much Oil, and only 32% as much gold as it did in 1999.

This isn't to suggest that the Index has moved up over the past few years; it obviously has. But it also reveals two fascinating factors: Iy shows how important relative performance of any asset class is; and secondly, it demonstrates how pernicious the effect of inflation has been. No wonder its called the cruelest tax.


A Comeback for the S.&P. (If the Yardstick Is Dollars)
NYT, May 5, 2007

Monday, May 07, 2007 | 05:57 AM | Permalink | Comments (28) | TrackBack (0)
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Doesn't this stuff really just show that the US currency has been devalued against everything that isn't artificially pegged to it? Wages: steady. Prices of Chinese imports: steady.

I mean, you call it inflation, but it's a bit different to the earlier episodes.

Posted by: SJ | May 7, 2007 6:50:22 AM

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