Sunday, May 22, 2011

The Impact of Starting P/E Ratio on 20-Year Stock Market Returns

One of the most dependable predictors of long-term stock market performance is the initial normalized price/earnings (P/E) ratio. This post uses a scatter plot to demonstrate the relationship that has existed historically between P/E and returns over the next 20 years.

Note: if you find the graph below difficult to understand, see Initial P/E and 20-Year Rolling Returns first.

Scatter Diagram: Starting P/E Ratio vs. 20-Year Stock Market Returns

starting/initial price/earnings ratio 20-year dow/stock market return/performance

The above scatter plot (click on image to expand) shows the historical relationship between the P/E ratio of the stock market at the time of purchase and the typical investor's return over the next 20 years. It is exactly analogous to the previously posted Starting P/E Ratio vs. 10-Year Stock Market Returns. And, both are conceptually related to Rolling Returns vs Initial P/E Ratios, which looked at the relationship of initial P/E and subsequent returns over time -- that is, with time as the horizontal axis.

Similar to the 10-year chart, each dot represents a hypothetical

Friday, May 13, 2011

What Would $10,000 in 19xx be Equivalent to Today?

Want to approximate what $1 in 1900 or 1929 or 1985 (or any other year) would be equivalent to today? How about what $100 or $1,000 today is equal to in past years? The graphs below will help you convert amounts in current 2012 dollars to amounts with the same buying/purchasing power in any prior year (beginning in 1900); you can also use it in the reverse direction. To see what today's dollar will be worth in the future, see What Will $100 be Worth 10 - 20 Years From Now?

NEW! Try my new interactive inflation calculator.  It does the same conversions as the graphs below, but you can convert from any year to any other year. Then come back to here; the graphs are still better for seeing the big picture.

I originally designed The Observations Inflation Spreadsheet to answer questions like the above, along with many other questions related to inflation and the impact of inflation on the dollar's purchasing power. The graphs below allow those without spreadsheets to approximate some of the spreadsheet's results.

What Was a Dollar in 19xx Worth vs. Today? e.g., What Was $10,000 in 1900 Equivalent to in 2012?

convert prior years dollar purchasing power to current 2012 dollars

The graph above (click to expand) converts dollar values from past years into their equivalent in today's dollars. For example,

Sunday, May 1, 2011

End of April 2011 Stock Market Update

April, Quarter-To-Date, Year-To-Date & Recovery-To-Date Review

After taking a month off, the market resumed its another-month-another-52-week-high advance. In fact, for the fourth of the last five months the market set a multi-year high -- this time besting levels last seen in 2008. All this while shrugging off yet another bit of bad news.

Last month, the Japanese earthquake, tsunami and near nuclear meltdown caused the market to "hiccup," and, ultimately cost it a chance to reach a multi-year high for the fourth month in a row. This month, the market received news that S&P, while continuing to rate U.S. debt as AAA, had changed the outlook for our debt from "Stable" to "Negative" -- for the first time in history. Not surprisingly, the market again "hiccupped" -- falling to