Inflation’s Steady Toll

May 13, 2013

05.13.13

Discussions have been increasing about stocks being overvalued. It is true that last week the U.S. equity markets hit another record high, but that was not on an inflation adjusted basis. We see this as encouraging given stocks tend to beat inflation by a wide margin over time, especially when you reinvest dividends. According to Yale University finance professor Robert Shiller, the S&P 500 hit its all-time high in early 2000. To surpass this previous peak on an inflation adjusted basis, the S&P 500 would have to appreciate another 20+ percent to 2,000 versus Friday’s closing price of 1,634 (See chart below).

From another perspective, rising stock prices seem to be thawing out the initial public offering market. Year-to-date 64 companies have become publicly traded enabling them to raise $16.8 billion.  This is an increase over last year-to-date but is well below the peak in the 1990s. More IPOs show investor confidence in the equity markets and the economy. This in turn gives companies the funding access required to grow their businesses, and, in turn, their stock prices.

“No matter how good you get you can always get better and that’s the exciting part.”
– Tiger Woods