Inflation: Inflation matters. Why? Look at the two charts here and you will see why inflation matters. Over time, inflation changes the "real price" of the things we buy by dramatic amounts. What everyone saw in 1980's Presidential Election was a big breakout in price above the major top extending back a decade. What really had happened though over the previous decade was a decline of 43% in the "real value of the portfolio" of stocks. That is a crushing decline, and a reason for investors to demand a change of leadership. What happened AFTER the election is the interesting part. The RAW ENTHUSIASM of the Reagan landslide victory in the electoral college vote 489-49 where Reagan won all states except 7 states (Hawaii, Minnesota, DC, Maryland, Rhode Island, Georgia, West Virginia), the market had a dramatic 27% decline from the peak which put the total drop in the market "inflation-adjusted" at 62.8%! It takes PAIN to help spur us on and 62.8% is a LOT OF PAIN. Many changes started in the depths of this BEAR MARKET decline which everyone KNEW and FELT, but doesn't SHOW in the popular price averages which aren't adjusted for inflation.
Some may argue that dividends helped reduce the amount of the decline, and that is true, but also tax rates were so high to offset that benefit or cushion of dividend income.
That is what I wanted to show you all today. A LONG TERM picture of PAIN, which is a very different story from what most people are summarizing about that time when they look back and talk about the 1970's-1980's in the news today. Be mindful of listening to ANYONE's summary of the past, for it likely glosses over very important facts with great omissions and mis-statements. Do your own research right here at TradingView.com and see for yourself so you aren't mis-led by the noise in the media.
Cheers.
Tim West
4:59AM EST February 3, 2017
PS - My favorite chart link below is the last one, DJIA INDUSTRIALS 100 YEARS .... Check it out.
Kommentar
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Add in the relative performance of the S&P500 versus GOLD which we do by dividing the S&P500 by the price of Gold (SPX500/XAUUSD) and you really see the picture even in more detailed "pain".
Kommentar
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And you can how President Bush did in his two terms versus Gold in this next chart.
Here's the data point: President Bush lost 78% vs Gold over his two terms, putting him just a little worse than President Jimmy Carter's loss of 75%. Amazing.
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fulrik
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Very interesting Tim! It is such a delight to watch you unpack events in the course of sense-making. Would have liked you to risk a bet on the future ;-)
timwest
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@fulrik, Good point. I would like to make a forecast, and I have a LOT of them here and most are bullish for the long term outlook for the stock market. My Fed Chairman chart is still one of my favorites, right after the "DJIA 100 YEARS PATTERN TELLS US TO..." chart. I have been around the markets for over 30 years and have been actively trading and investing and have learned a lot. I think the sentiment right now is 'as negative' or 'more negative' than at the depths of the 2002-2003 bear market bottom and at the bottom of the financial crisis of 2007-2009. People's HATRED of Trump is a great contra-indicator because most likely that level of negative sentiment (hatred) has caused them to sell their stocks or at least lighten up to the lowest amount of equities possible. I don't think I recall a time when so many major fund managers and famous portfolio managers have come out forecasting a major price drop in the market. This is really a major signal to me that there is a decent sized move ahead in the S&P500... and most likely UP first, higher and longer than anyone thinks.
timwest
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@timwest, Interesting to review these comments from Feb 9, 2017.
faylee
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Nice analysis! Thank you for the share, I'm studying:)
grahvity
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Wow! Thanks for this insight.
ewtrder
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Are you kidding sir? back to 1980 the market PE is ridiculously oversold due to high inflation. We if you are a decent veteran investor you should compare the 2016 election to 1996 election. tell them the truth;)
timwest
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@ewtrder, Hi. Sorry I didn't notice your comment since it was almost a month after I posted this chart. I'm glad you found it. The reason to compare to Reagan is that Obama was a lot like Carter and Trump liked to compare himself to Reagan. Interesting that back then we were in a massive inflation and now we are in a massive "non-inflation". That's the main difference. We need to get the economy going and we are in a demographic tailspin too. The market in 1982 had just gone down 62% in real terms, and sideways for 20+ years. The market today also has done the same. Look at this chart.
s3.amazonaws.com/tradingview/snapshots/s/sTcpITF5.png I can't tell if your grammar is off because you speak many languages, but there is no need to insult me for putting up some research that I think is very interesting. So, if you have any more insults to toss at me, you can expect me to ignore you and then to report you.
CoffeeHero
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Side-note: Inflation also affects savings, so I think the stock market still provides the best return.
A-shot
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Inflation hasn't been around recently, so the charts lately look quite similar. But i again reminded myself the Obama's 8 years were followed with a constant market run up, so i wonder why would i expect a similar move with the next president (especially if it is Trump).
timwest
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@2use, (I typed out a reply on my iPhone and replied but it didn't post somehow. So, OK, here I go again) I didn't say I expect a similar move UP as we had from 1980 to 1987, because I was drawing parallels to the 75%-78% destruction of the stock market relative to gold to point out that level of pain causes major shifts to happen, especially from one party to another and in this case and before, from Democrats back to Republicans. Trump is doing his best to say he has Reagan-like, pro-growth incentives, who believes in less Gov't, less waste, less taxes, less regulations. So, there is similarity there. The "nominal new high" is similar. I would also add that inflation has been much higher than reported over the last 15 years, but that is because we do have some very odd reporting going on for hedonistic adjustments (quality and efficiency) that allows inflation to stay artificially low. China has certainly made our inflation lower, and Mexico, and India because we can outsource, trade and shop on the internet anywhere in the world to get the lowest price. Trump's call to grow the economy should be great for earnings, but it may also increase volatility and uncertainty since we don't know the world response yet to Trump's ideas. The last 8 years was full of raising tax-rates, raising Gov't spending, raising entitlement spending, raising forcibly health-care spending, and shutting down the banks from lending, increasing the cost of hiring, raising the minimum wage and sitting back and watching corporations leave the US to find safer tax-havens elsewhere around the world using tax-shelter-schemes that are bogus. We have a LOT to look forward to amidst the current chaos here with people who perceive their civil rights will be taken away forcibly by Trump-Pence.