From the introduction of the Euro in 99, here’s a chart showing the S&P500 in Euros.
You’ll notice that there are a few periods. To about early 2003, the two moved more or less in tandem. The S&P goes up or down, so does the Euro S&P. It may be higher or lower, but they’re moving together. From early 2003 to early 2005, the S&P in Euros stays basically flat, no matter what the nominal S&P does. Since then S&P in Euros has risen, but risen much more slowly than the nominal S&P. It’s too early to tell if the recent problems will change that trend-line again however the next chart (done in days, rather than months) suggests it migh be occuring.
At this point the lesson is fairly simple — measured in Euros (you’d get similiar results in pounds, or with other indices like the Russel 3000 or the Dow) the market has never recovered from its crash. Nominal numbers may say otherwise, but really most of what has been happening is that as the dollar went down, stocks went up. From monthly top (August of 00) to monday’s close the S&P is currently up about about 2%.
In terms of the Euro, it’s down about 32%.
Let’s take a look at a Euro chart:
Read that chart and weep. If you had taken $1,000 US in, August of 08, and just bought Euros, today you would have approximately 1,600 dollars. Bottom line. In Euros, the US stock market has never recovered. It’s barely even moved. 3% is nothing. It’s essentially just barely beating the depreciation of the dollar.
Since the bottom in 2003 it has been beating the Euro – a dollar invested at the monthly bottom in the S&P would have made you $1.84, versus $1.48 for just buying Euros – but again, that means that slightly more than half the S&P’s appreciation off its low is just monetary depreciation.
Here are the questions for the future.
1) Will foreigners keep investing the US or will they start pulling their money out? Specifically what will foreign government do, most especially the Saudis and Chinese? Will individual investors start to either edge for the door or to stampede for it? Indications are that the Chinese have decided to “diversify”. They now deny it, but that’s their pattern, deny then do.
2) Will the Fed keep dropping interest rates? Every interest rate drop makes the US dollar much less attractive to investors. General consensus right now seems to be that the Fed should continue to do so (I don’t agree, but that’s another matter).
3) Can inflation be controlled with a dropping dollar, wage inflation occuring in China and oil prices going through the roof. Note here that we’re talking about inflation as the government measures it and the Fed uses it (core inflation), which isn’t inflation as ordinary people exerience it.
4) Will the asset issues that many financial institutions are having spark a panic as people try and get out? If so, the markets will crash (so far they’ve proved remarkably resilient, probably because the Fed and other central banks are pumping out huge amounts of liquidity.)
5) Will the bursting of the housing bubble lead to a crash in consumer spending. Again consumers, bouyed by huge amounts of credit, have proved very resilient. But will the lending, and borrowing, continue even though everyone knows much of the money can never ben paid back. (The anser is not obviously that lending to deadbeats won’t happen, unfortunately. Keeping the game going is the name of the game, because the consequences of market failure are so high.)
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