Stock Recovery: Real or Fake?

Dave  Grabaskas
Mar 8, 2011 at 12:13 PM

Economists often discuss the health of the economy in terms of how many ounces of gold the Dow or S&P 500 is worth . What does that mean exactly and why is it important? 

Below is a series of charts that I hope will help explain the situation. 

The first thing to remember is that stocks are valued in DOLLARS, and just like any other good valued in dollars, this means that distorting the dollar will also lead to distortions in stock prices.  

You may have heard recently about the great run up in stocks since the 2008 crash and how this is a sign of a general recovery. Below is a chart of the S&P 500 Index (which I believe is a better indicator than the Dow Jones) since 2008. As you can see, there has indeed been an over 100% rise in prices since the low of the crash in March 2009.  (You can right-click and open the charts in a new window for a better look.)

S&P

Now, if this recovery is due to the increase in the worth of the companies and a general recovery, as many economists/traders say, you would expect to see the price of stocks to also increase in terms of other valuations. 

Below is a chart of the S&P 500 divided by the price of gold. This is the chart that people refer to when they talk about the value of the S&P 500 in ounces of gold. It is important to remember, when looking at this chart, that the exact price is not what’s important, since it’s just a ratio, but the percent change over time.  As you can see, in terms of gold, the S&P 500 has actually been down since September 2009.

S&P_Gold

If you look at the S&P 500 in terms of silver, the picture is even worse. 

S&P_Silver

Now we all know that there has been a great run up in gold and silver lately, which some would say lessens the importance of these graphs. However, look at the S&P 500 divided by other goods that aren’t precious metals, like oil. In terms of oil, stock prices are still below their 2009 low.

S&P_Oil

The trend continues in other commodities, such as corn or soybeans.

S&P_Corn

S&P_Soybean

You would be hard pressed to find any good or commodity that show stock prices as actually recovering. What this shows is that this recovery in stocks is not based on any increased value in the company itself, but simply because the value of what the stocks are priced in (dollars) has gone down. 

very interesting, good info

David Hoyt's picture

The "recovery" is obviously fake. S&P 500 moved up 11% last yr which happens to be the inflation rate the Austrian School counted using the Austrian TMS (Total Money Supply) figures. The Fed only knows how to create inflation. There was no recovery. BLS is lying about unemployment stats too. CPI is doctored to remove inflation away via substitution, hedonics and geometric weighting.

's picture

You know, I think I like this post not only because of how eye opening it is, but because I have been looking forever for a stock chart maker that I could use gold as a price, thanks Dave, you saved me a lot of time.

Creighton Harrington's picture