Real Total Returns
The final chart in our series gives the most disturbing comparison of these two epic bear markets. Here we see the total returns adjusted for inflation (or deflation in the case of the earlier period). For the past 21 months, the secular bear market that began in 2000 has substantially underperformed the equivalent timeframe during the Great Depression.
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A Footnote on Inflation/Deflation Adjustment
Since the early days of World War II, with minor exceptions, increasing price levels (aka inflation) have been the standard expectation. Thus the adjustment we make to approximate real prices is labeled an "inflation" adjustment. In prior decades, however, deflation was commonplace, especially during the Great Depression (illustrated here). Thus the counterintuitive result of adjusting for deflation is that the real price is higher than the nominal price. This adjustment, together with the much higher dividend yields during the Great Depression (see this illustration), explains the rather stunning truth that since around the time of the Lehman collapse in 2008, the market has underperformed the matching timeframe of the Great Depression.
Note: These charts offer a comparison of two distinctive market cycles separated by over 70 years. They are not intended as a forecast for the current market.
Copyright (c) Doug Short, dshort.com
