The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 22

The Silent Crash No One Noticed

Everyone knows the market is up, but adjusted for inflation it's still cheaper than in the 1960s—right or wrong? It turns out that's right. The top half of this chart shows Jones Industrial Average from 1915 to 1984. The chart's bottom half adjusts for inflation—a different story. Between the two stock market charts lies a single line representing inflation, via the Consumer Price Index.

First, note the chart's earliest years. Stock prices, adjusted for inflation, dropped sharply from 1915 through 1921. As you can see in Chart 53, there was tremendous inflation throughout the Western world during this period. Since stock prices weren't going anywhere (see Chart 27), they were declining on an inflation-adjusted basis. If stocks don't increase while inflation rages, then they're falling in “real” value. This created the bargains that set the stage for the 1920s.

Interestingly, the 1920s superbull market was larger on an inflation-adjusted basis, because consumer prices fell slightly from 1921 to 1929. The Dow Averages increased 5.97 times in value, from 63.9 in 1921 to 381.17 in 1929, but on an inflation-adjusted basis they increased 6.4 times from 33.83 to 216.33. And, while of little consolation to investors, the decline after 1929 was only 86 percent adjusted for inflation, rather than the Dow's actual 89 percent drop—again, because consumer prices dropped.

From there, inflation continually beat the market's real return downward, so that ...