July 15, 2002
S&P Composite Round Trip

The S&P Composite index is now back where it was in mid-1997. In real inflation-adjusted terms, it is back where it was in the winter of 1997, two months after Alan Greenspan wondered how we would know if the stock market had become the victim of irrational exuberance. That means that if you had invested in a diversified portfolio of stocks that matched the S&P Composite on the day of Alan Greenspan's speech, held it, reinvested the dividends, and tracked changes in the index since, you would have made about 3.5% per year in real returns over the past five and a half years. By contrast, you would have gotten 4.2% per year over and above inflation--a higher return with practically no risk at all--had you simply invested your money in 10-year Treasury bonds with 5 1/2 years until their maturity.

The 5 1/2 years since Greenspan made his "irrational exuberance" speech have thus been one of those relatively rare periods during which in aggregate and on average government bonds have outperformed stocks.

Posted by DeLong at July 15, 2002 04:44 PM | Trackback

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I think a lot of work here is being done by "if you had tracked changes in the index", since this effectively means "if you had doubled up on MSFT and CSCO at the top". And Nortel, thinking about it, because that was in the index until last week. Do we know what the CRSP Equally-Weighted portfolio has done? Survivorship bias is a tricky thing.

Posted by: Daniel Davies on July 16, 2002 03:34 AM

You're right. Survivorship bias is a very tricky thing. Let me see if someone has spun the CRSP tape already...


Brad DeLong

Posted by: Brad DeLong on July 16, 2002 08:07 AM

I was confused by the term "winter 1997." If you want to be exact, Greenspan made his speech on December 5, 1996.
http://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm

I personally pulled a lot of money out of the market just before his speech, because I didn't like the high P/E ratios. I'm starting to put money back into the market now, in part because the relationship between P/E and the real interest rate is looking more attractive and in part because an economist named Brad DeLong has convinced me that productivity is going to grow rapidly.

Posted by: Arnold Kling on July 16, 2002 09:11 AM

At Barra.Com pe ratios for the s&p and value, growth, midcap, and small cap indexes can be easily tracked fro january 1977 - the indexes can be tracked including companies with losses and excluding such companies - however i read the number pe ratios seem remarkably high - i do not understand - go to barra and find index page and "fundamentals"

Posted by: randall on July 16, 2002 09:29 AM

There is no survival bias in the S&P500. The published return is realizable and index funds are able to track it quite closely. A picture of index fund NAV would look undistinguishable to the naked eye to your picture of the S&P.

It is true that the S&P is not truly a passive index in the sense that the Standard & Poor's committee is always tinkering with the composition of the index. I wish they didn't. However, this does not affect the return very much. For example the Wilshire 5000 is down 42% from its high, the S&P 500 is down 41%. No big deal.

I haven't looked at the CRSP value weighted, but again the results are likely to be similar. (The CRSP Equal weighted is a different beast and I would not use that to manage money).

Posted by: Alex Castaldo on July 18, 2002 09:04 AM
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