S&P is consistently beating inflation?
"TL;DR: Because stocks represent added value from corporate profits, and not the price the goods themselves are sold at. This is actually a very complicated subject.  But here's the simplest answer I can come up with.  Stocks are a commodity, just like milk, eggs, and bread.  The government only tracks certain commodities (consumables) as part of the Consumer Price Index (CPI).  These are generally commodities that the typical person will consume on a daily or weekly basis, or need to survive (food, rent, etc.).  These are present values. Stock prices, on the other hand, represent an educated guess (or bet) on a company's future performance.  If Apple has historically performed well, and analysts expect it to continue to perform, then investors will pay more for a stock that they feel will continue pay good dividends in the future.  Compound this with the fact that there is usually limited a supply of stock for a particular company (unless they issue more stock). If we go back to Apple as an example, they can raise their price they charge on an iPhone from $400 to $450 over the course of say a couple years.  Some of this may be due to higher wage costs, but efficiencies in the marketplace actually tend to drive down costs to produce goods, so they will probably actually turn a higher profit by raising their price, even if they have to pay higher wages (or possibly even if they don't raise their price!).  This, in economics, is termed value added. Finally, @Hart is absolutely correct in his comment about the stocks in the S&P 500 not being static.  Additionally, the S&P 500 is a hand picked set of ""winners"", if you will.  These are not run-of-the-mill penny stocks for companies that will be out of business in a week.  These are companies that Standard & Poor's Financial Services LLC thinks will perform well." "Inflation and stock returns are completely different things The CPI tracks the changes in the prices of a basket of goods a consumer might buy, the S&P 500 tracks the returns earned by investors in the equity of large companies.  The two are very different things, and not closely linked. Example: A world without inflation Consider a world in which there was no inflation.  Prices are fixed.  Should stocks return zero?  Certainly not.  Companies take raw materials and produce goods and services that have value greater than that of the raw materials.  They create new wealth.  This wealth becomes profit for the company, which then is passed on to the owners of the company (equityholders) either in the form of dividends or, more commonly, price increases. Example: A world with no inflation and no economic growth Note that I have not implied above that companies have to grow in order for returns to outperform inflation.  Total stock returns depend on the current and expected profit of the firm.  Firms can remain the same size and continually kick out profits.  Total returns will be positive in this environment even if there is no growth and no inflation.  If the firms pay the money out as dividends, investors get a cash flow.  If they retain these earnings, the value of the firm's equity increases.  Total returns take both types of income into account.  Technically the S&P 500 is not a total return index, but in our current legal and corporate culture environment, there is a preference for retaining profits rather than paying them out.  This causes price increases. Risk bearing In principle, if profit was assured, then investors would bid up stock prices so high that profit would have to compete with the risk-free rate, which often is close to inflation (like, right now).  However, profit is not assured.  Firm profit swings around over time and constitutes a significant source of risk.  We can think of the owners of the firm as being the bondholders and equityholders.  These assets are structured such that almost all the profit risk is born by equityholders.  We can therefore think of equityholders as being compensated for bearing the risk that would otherwise  be born by bondholders.  Because equityholders are bearing risk, stock prices must be low enough that stocks have a positive expected return (above the risk-free rate, which is presumably not significantly below inflation).  This is true for the same reason that insurance premiums are positive--people have to be compensated for bearing risk. See my answer to this question for a discussion of why risk means we should expect stock prices to increase indefinitely (even if inflation halts). The S&P is not a measure of firm size or value The S&P measures the return earned by investors, not the size of US companies.  True, if constituent companies grow and nothing else changes, the index goes up, but if a company shrinks a lot, it gets dropped out, rather than dragging the index down. By the way, please note that dollars ""put into"" equities are not stuck somewhere.  They are passed on to the seller, who then uses it to buy something (even if this is a new equity issuance and the seller is the firm itself).  The logic that growth of firms somehow sucks money out of usage is incorrect." "The U.S. economy has grown at just under 3% a year after inflation over the past 50 years. (Some of this occurred to ""private"" companies that are not listed on the stock market, or before they were listed.) The stock market returns averaged 7.14% a year, ""gross,"" but when you subtract the 4.67% inflation, the ""net"" number is 2.47% a year. That gain corresponds closely to the ""just under 3% a year"" GDP growth during that time."
"Yes. The definition of unreasonable shows as ""not guided by or based on good sense."" 100% years require a high risk. Can your one stock double, or even go up three fold? Sure, but that would likely be a small part of your portfolio. Overall, long term, you are not likely to beat the market by such high numbers.  That said, I had 2 years of returns well over 100%. 1998, and 1999. The S&P was up 26.7% and 19.5%, and I was very leverage in high tech stock options. As others mentioned, leverage was key. (Mark used the term 'gearing' which I think is leverage). When 2000 started crashing, I had taken enough off the table to end the year down 12% vs the S&P -10%, but this was down from a near 50% gain in Q1 of that year. As the crash continued, I was no longer leveraged and haven't been since. The last 12 years or so, I've happily lagged the S&P by a few basis points (.04-.02%).  Also note, Buffet has returned an amazing 15.9%/yr on average for the last 30 years (vs the S&P 11.4%). 16% is far from 100%. The last 10 year, however, his return was a modest 8.6%, just .1% above the S&P." "They don't, actually. Though in some time frames S&P 500 growth out performs S&P 500, it often lags. This is because ""growth"" doesn't refer to what happens to your account, but rather the type of stock in the index -- roughly speaking, it's the half of the S&P with the best earnings growth.  That would be great, except it's not looking for is to see if that growth is worth buying. A stock with a 20% growth rate is a great buy at a P/E of 15, but a terrible buy at P/E/ 50.  That leads to what JB King was talking about -- there's also the S&P 500 Value, which is roughly the cheapest stocks relative to earnings. Value does tend to beat the broad index over the long haul, because there's nothing like getting a good deal (note a stock can be in both the growth and value categories). This holds true with other indexes as well like the Russel 2000. All that said, you're not going to see a huge difference between S&P 500 and S&P 500 Growth. I believe this is because the S&P 500 itself leans a bit to the growthy side.   PS: With VOOG Vanguard is tracking the S&P 500 Growth Index, which is actually a thing and not Vanguard itself filtering stocks." "You can see how much of a percentage the S&amp;P 500 is of the GDP over the past 10 years in this handy graph:  https://fred.stlouisfed.org/graph/?g=oCZ  When the stock market was doing poorly (2009) it was only 0.06% of GDP. When it's doing well (now) it's 0.12% of the GDP.  It's also not useful to directly compare percentages like you're doing. Just because one averages 6% growth and one averages 3% growth, that doesn't mean that the 6% one will take over. It doesn't take much of a correction to wipe out decades of S&amp;P vs GDP growth.  You might also be interested in knowing that this ratio is similar to the ""Buffet Indicator"", how Warren Buffet decides if stocks are overvalued as a whole:  https://www.advisorperspectives.com/dshort/updates/2017/04/04/market-cap-to-gdp-an-updated-look-at-the-buffett-valuation-indicator" "Your explanation is nearly perfect and not ""hand wavy"" at all. Stock prices reflect the collective wisdom of all participating investors. Investors value stocks based on how much value they expect the stock to produce now and in the future. So, the stability of the stock prices is a reflection of the accuracy of the investors predictions. Investor naivity can be seen as a sequence of increasingly sophisticated stock pricing strategies: If investors were able to predict the future perfectly, then all stock prices would rise at the same constant rate. In theory, if a particular investor is able to ""beat the market"", it is because they are better at predicting the future profits of companies (or they are lucky, or they are better at predicting the irrational behavior of other investors......)" "At the bottom of Yahoo! Finance's S & P 500 quote Quotes are real-time for NASDAQ, NYSE, and NYSE MKT. See also delay   times for other exchanges. All information provided ""as is"" for   informational purposes only, not intended for trading purposes or   advice. Neither Yahoo! nor any of independent providers is liable for   any informational errors, incompleteness, or delays, or for any   actions taken in reliance on information contained herein. By   accessing the Yahoo! site, you agree not to redistribute the   information found therein. Fundamental company data provided by Capital IQ. Historical chart data   and daily updates provided by Commodity Systems, Inc. (CSI).   International historical chart data, daily updates, fund summary, fund   performance, dividend data and Morningstar Index data provided by   Morningstar, Inc. Orderbook quotes are provided by BATS Exchange. US   Financials data provided by Edgar Online and all other Financials   provided by Capital IQ. International historical chart data, daily   updates, fundAnalyst estimates data provided by Thomson Financial   Network. All data povided by Thomson Financial Network is based solely   upon research information provided by third party analysts. Yahoo! has   not reviewed, and in no way endorses the validity of such data. Yahoo!   and ThomsonFN shall not be liable for any actions taken in reliance   thereon. Thus, yes there is a DB being accessed that there is likely an agreement between Yahoo! and the providers." "Being long the S&P Index ETF you can expect to make money. The index itself will never ""crash"" because the individual stocks in it are simply removed when they begin performing badly. This is not to say that the S&P Index won't lose 80% of its value in an instant (or over a few trading sessions if circuit breakers are considered), but even in the 2008 correction, the S&P still traded far above book value. With this in mind, you have to realize, that despite common sentiment, the indexes are hardly representative of ""the market"". They are just a derivative, and as you might be aware, derivatives can enable financial tricks far removed from reality. Regarding index funds, if a small group of people decide that 401k's are performing badly, then they will simply rebalance the components of the indexes with companies that are doing well. The headline will be ""S&P makes ANOTHER record high today"" So although panic selling can disrupt the order book, especially during periods of illiquidity, with the current structure ""the stock market"" being based off of three composite indexes, can never crash, because there will always exist a company that is not exposed to broad market fluctuations and will be performing better by fundamentals and share price. Similarly, you collect dividends from the index ETFs. You can also sell covered calls on your holdings. The CBOE has a chart through the 2008 crisis showing your theoretical profit and loss if you sold calls 2 standard deviations out of the money, at every monthly interval. If you are going to be holding an index ETF for a long time, then you shouldn't be concerned about its share price at all, since the returns would be pretty abysmal either way, but it should suffice for hedging inflation." Eh using a benchmark that's designed for Hedge Funds is a little different. I was guessing the other comment was referring to SPX or similar for the 10%. Most people don't understand HF as investment vehicles. They are meant to be market neutral and focused on absolute returns. Yes, you can benchmark them against each other / strategy but most people here seem to think that HFs want to beat the S&amp;P 500. Inflation can be a misleading indicator. Partly because it is not measured as a function of the change in prices of everything in the economy, just the basket of goods deemed essential. The other problem is that several things operate on it, the supply of money,  the total quantity of goods being exchanged, and the supply of credit. Because the supply of goods divides - as more stuff is available prices drop - it's not possible to know purely from the price level, if prices are rising because there's an actual shortage (say a crop failure), or simply monetary expansion. At this point it also helps to know that the total money supply of the USA (as measured by total quantity of money in bank deposits) doubles every 10 years, and has done that consistently since the 1970's.  USA Total Bank Deposits So I would say Simon Moore manages to be right for the wrong reasons. Despite low inflation, cash holdings are being proportionally devalued as the money supply increases. Most of the increase, is going into the stock market. However, since shares aren't included in the measures of inflation, then it doesn't influence the inflation rate. Still, if you look at the quantity of shares your money will buy now, as opposed to 5 years ago, it's clear that the value of your money has dropped substantially.  The joker in the pack is the influence of the credit supply on the price level. Gold is a risky and volatile investment. If you want an investment that's inflation-proof, you should buy index-linked government bonds in the currency that you plan to be spending the money in, assuming that government controls its own currency and has a good credit rating. Well, you can't really have it both ways. You said that they were both using the same method, but, in fact, they aren't. You can call the weighting biased, but in fact if appears that BPP is doing little or minimal weighting, and yet still is showing that prices, in general, are mapping similarly to the BLS published CPI.   Unless you're arguing an MIT 'academic conspiracy' (and even if you are), I think you've failed to make your case.  BPP is independant, it uses a different methodology, and yet the results confirm those of the BLS. &gt;I would be interested in knowing how much of the recent returns of the S&amp;P are being driven purely by the Fed bond purchase program, controlling for other macro-economic variables.  The correlation of asset purchase dollars and SPX level does not answer this question. The answer would depend on the equities held. Some can weather inflation better than others (such as companies that have solid dividend growth) and even outpace inflation. Some industries are also safer against inflation than others, such as consumer staples and utilities since people usually have to purchase these regardless of how much $ they have. In looking over the data comparing S&P 500 returns, dividends, and inflation, the results are all over the map. In the 50's the total return was 19.3% with inflation at 2.2%. Then in the 70's returns were 5.8% with inflation at 7.4 percent, leading one to think that inflation diminished returns. But then in the 80's inflation was 5.1%, yet the return on the S&P was up to 17.3% Either way, aside from the 70's every other decade since 1950 has outpaced inflation (as long as you are including dividends; hence my first paragraph). S&P 500: Total and Inflation-Adjusted Historical Returns Also, the 7% average stock appreciation you mention is just that, an average. You are comparing a year-over-year number (7% inflation) with an aggregated one (stock performance over x number of years) and that is a misrepresentation and is not being weighted for the difference in what those numbers mean. Finally, there are thousands of things that have an effect on the stock market and stocks. Some are controllable and others are not. The idea that any one of them, such as inflation, has any sort of long-term, everlasting effect on prices that they cannot outmaneuver is improbable. This is where researching your stocks comes in...and if done prudently, who cares what the inflation rate is? Ok opinion but too bad it's not supported by data in the article. The opinion is backed by a survey of opinions, not actual inflation and employment figures. If prices are rising generally (and not just in individual commodities), why isn't that being reflected in inflation and employment numbers? Wouldn't we expect to see gross employment numbers trending downwards and inflation trending upwards since the beginning of the year? This didn't answer his question. Also, while I agree with you that the Dow is meaningless (and your explanation why). In the investment industry, we don't only focus on the S&amp;P Index.. Many have a specific benchmark they aim to outperform that matches their investment strategy (i.e. Russell Mid Cap Value, Russell 3000, etc.). "This is the best tl;dr I could make, [original](https://www.bloomberg.com/news/articles/2017-09-13/fed-s-patient-or-preemptive-clash-looms-as-inflation-misses-goal?cmpId=flipboard) reduced by 91%. (I'm a bot) ***** &gt; The debate over whether the Fed should get ahead of the inflation curve or stick with a wait-and-see approach is heating up ahead of the Federal Open Market Committee&amp;#039;s meeting next week.  &gt; Part of the doubt is due to low inflation expectations, which may represent the underlying, trend level of inflation.  &gt; &amp;quot;The key question in my mind is how to achieve an improvement in longer-run inflation expectations to a level that will allow us to achieve our inflation objective,&amp;quot; Brainard said.   ***** [**Extended Summary**](http://np.reddit.com/r/autotldr/comments/6zwx8i/act_or_wait_fed_debate_heats_up_after_inflation/) | [FAQ](http://np.reddit.com/r/autotldr/comments/31b9fm/faq_autotldr_bot/ ""Version 1.65, ~209135 tl;drs so far."") | [Feedback](http://np.reddit.com/message/compose?to=%23autotldr ""PM's and comments are monitored, constructive feedback is welcome."") | *Top* *keywords*: **inflation**^#1 **whether**^#2 **market**^#3 **policy**^#4 **year**^#5"