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Here is a chart that overlays its performance on the legendary Dow Crash and Great Depression with the S&P 500 of the 21st century. Both are adjusted for inflation using the Bureau of Labor Statistics' Consumer Price Index (CPI). Dividends are excluded. As the chart illustrates, at the nine-year point, both major markets were registering similar staggering losses.
Most people, however, evaluate market performance in nominal terms with no inflation adjustment, as in the next chart, which obscures the true starting point of our 21st century downturn. Such charts also foster what economists call the money illusion — an unreal image of wealth based on nominal dollars with shrinking purchasing power. By the nominal comparison, the market performance during first decade of the 21st century has been significantly stronger than during the Great Depression.
But wait. Could it be that even in our inflation-adjusted chart, the current market gets a "money illusion" boost compared to the earlier Dow?
Let's look at the same chart — this time adjusted using the Alternate CPI maintained by Economist John Williams at his Shadow Government Statistics website. This disturbing chart suggests that, after a decade of nominal price volatility, the real value of the current market is dramatically lower than the equivalent point after the Crash of 1929.
The Alternate CPI preserves the algorithms in place before 1982, when the Bureau of Labor Statistics began introducing a series of modifications to their calculation methods. Those modifications have significantly reduced the government's official estimate of inflation, which has had a ripple effect throughout the economy. For example, Social Security Cost-of-Living-Adjustments (COLAs) are accordingly reduced — not a happy outcome for senior citizens. The chronic lowballing of inflation also facilitated the environment of low interest rates that have contributed to the inflated prices of assets purchased with cheap borrowed money — hence the twin bubbles in equities and real estate).
Here is a chart that shows the larger context for the two historical periods and the very different inflationary/deflationary environments.
For an extensive series of charts, including several that compare the differences between the CPI and Alternate CPI on key economic metrics, visit this amazing collection at the National Inflation Association website. I've now added a permanent link to the Association in the research section of my right column.
For a fascinating perspective on the adjustments to the official CPI calculation method, see these videos from ChrisMartenson.com.
Conclusions
Of the three market overlay charts, the nominal version is the least useful for comparing the decline is equity asset values. The real overlay based on the official CPI is flawed by the radically different calculation methods during the two periods. The overlay based on the consistent CPI calculation methods preserved by ShadowStats probably gives a more accurate comparison of the relative loss in value of these two vastly different timeframes — one deflationary and the other inflationary (although the degree of contemporary inflation is debatable).
The first decade of the 21st century is a vastly superior economic environment compared to the 1930s. We are not at this point in a Second Great Depression. Nevertheless, the similarity in the real deflation of equity asset values is rather stunning — and a fact that is poorly understood by the majority of investors.
Footnote on Dividends: The comparison of these two secular bears is based on index price only, excluding dividends. The inclusion of dividends would work to the detriment of the current secular bear. The average annualized dividend yield during the 1930s was 5.53%. For the 21st Century Bear, the annualized yield has been 1.84%.
I'll periodically review this chart series in the months ahead.
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