Investors are not paying attention to the real returns of this stock market. Rich Karlgaard, publisher of Forbes, wrote a spot-on piece recently in The Wall Street Journal. He pointed out that the S&P 500 is up 124% over the past four years, but gold is up 88%, oil 106%, and silver 167%. The broad correlation between stocks and commodities implies that dollar weakness is driving prices higher, not the fundamentals of supply and demand. In light of that, the stocks’ returns aren’t that great in real-dollar terms. Karlgaard also compares this rally to that of the 1974–80 market when the S&P gained 103% but gold rose by 182%, oil by 270%, and silver by 340%.
To see what a real bull market looks likes, as Karlgaard points out, look at the period from August 1982 to January 2000. During that span, the S&P 500 was up 1,194%, gold was down 35%, oil was down 23%, and silver down 17%. That’s what strong dollar returns look like. Karlgaard writes:
The difference between illusory stock rallies and the real thing is stark. During the Ford, Carter and Obama years, the weakening U.S. dollar drove investors out of cash. In the Reagan, Bush 41 and Clinton years, Americans benefited from a strong dollar, while stocks (and bonds) wildly outperformed commodities.
The other major difference here is growth. The annual increase in the nation’s gross domestic product under Reagan-Bush-Clinton averaged 3.6%. Under Mr. Obama, annual GDP growth is sputtering along at less than half of the Reagan-Bush-Clinton rates.
Where do stocks go from here? Bears fret that stocks have outpaced weak economic growth and therefore are overvalued. The silver lining is that stocks haven’t really done that well since March 2009, despite the nominal 124% gain. They could do better—a lot better—if America’s tax, regulatory and monetary policies were shaped to provide a 1982-2000 tailwind.
Today’s market isn’t anything great in real terms. The best way to make it through this market is to recognize that commodities have been going up along with the stock market. Your dollars aren’t doing as well in real terms. If you recognize this, and understand what years of ’70s-style stagflation can do to your retirement income, then it’s time to put a plan in place that will help you win the war.