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:

The graph above uses *monthly* data, as provided by Robert Shiller on his very helpful site.

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 **not** adjusted for inflation) is 10.9% a year.

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.