John Maynard Keynes had famously said that in the long
What is looked at is the (dividend-reinvested) return of the Standard and Poor’s 500 stock index for the last 150 years not adjusted for inflation. Here is the graph:
Now, the graph above looks an awful lot like a straight line. To see how much like a straight line it is, there is a regression analysis in Rivin’s paper, and the trend accounts for 99% of the variance! (for the curious, the annualized slope of the line is 0.1035, in other
The main question this leads to is the obvious: Why is the trend so strong?
The main takeaways are:
- Go long when the curve goes below trend, go short when below.
- Since (for the third time) the graph is not inflation adjusted, inflation is the real return killer.
To make the last point clearer, let’s now plot the “deflated” returns of the S&P 500 (also in the referenced paper):
The graph is much less straight now (correlation is now “only” 90%, vs 99.5% before), and one can see long flat sections.