I have railed before against reporters using the stock market as a measure of economic performance. The stock market is a measure of how well people who own lots of stock are doing, just as corn prices are a good measure of how well corn growers are doing. Stock prices may rise because the economy is growing rapidly and corporate profits are growing along with it. Alternatively, stock prices may rise because profits are rising at the expense of wages or simply because stockholders are being irrationally exuberant. The latter two causes of price increases are surely not good news for the bulk of the population. However, insofar as reporters do care to examine how the 25 percent of families who have substantial (more than $30,000) stock holdings are doing, there is the further admonition that they should focus on the broad S&P 500 index that represents the bulk of the capital of publicly traded corporations in the United States, not the Dow Jones Industrial Average which includes just 30 blue chip companies. The two give somewhat different stories over the last calendar year. The Dow Jones Index was up a respectable 6.5 percent over the course of 2007. By contrast, the S&P 500 increased by just 3.5 percent, putting it roughly even with inflation. In fact, investors in stock have not done very well over the last decade. The S&P 500 rose by a cumulative total of 52.6 percent from December 1997 to December 2007. After adjusting for inflation, the increase was 17.3 percent, which translates into real growth of just 1.6 percent a year. Add in a dividend yield of approximately the same size and we get that the average real return on stocks over the last decade has been 3.2 percent, a bit lower than the yield available on inflation indexed government bonds at the time. Well, at least the CEOs are doing well.
--Dean Baker
