Unexpectedly Intriguing!
October 17, 2007

The latest update of our signature tool, The S&P 500 at Your Fingertips, in which we've brought the tool up to date with all the price, dividends, earnings and inflation data for the S&P 500 through September 2007, comes just as the index has retreated below the new highs it has set in the past week.

For those just discovering Political Calculations, our S&P 500 tool can find the rate of return an investment in the S&P 500 would realize between any two months from January 1871 through September 2007, both with and without reinvesting dividends and with and without the effect of inflation! Here are the S&P 500's compound annual growth rates since January 1871, since September 2006 (Year over Year) and since January 2007 (Year to Date):

Selected S&P 500 Performance Data, January 1871 through September 2007
Annualized Rates Nominal Rate of Return (%) Rate of Inflation (%) Real Rate of Return (%)
Since January 1871 9.17 2.08 7.09
Year over Year 15.64 2.76 12.88
Year to Date 9.70 4.53 5.17

This month's bonus chart illustrates the history of the Price/Earnings Ratio (P/E Ratio) for the S&P 500 since January 1871:

S&P 500 Price Earnings Ratio, January 1871 through September 2007

For the chart above, the P/E ratio is found by taking the average monthly price per share for the S&P 500 and dividing it by the preceding 12 months of earnings per share for the index (one-year trailing earnings).

What might be surprising to most people is that the all-time peak in the S&P 500's P/E ratio was set nearly three years after the peak of the stock market in the midst (and previous all-time peak of the P/E ratio) during the bubble market of the late 1990s! This outcome is really a bit of a mathematical artifact - it occurred as stock market earnings bottomed out during the recession of 2001 while the forward-looking nature of the stock market anticipated a recovery, increasing the relative price per share with respect to the past year's earnings per share.

Since then, earnings in the S&P 500 have largely caught up to the index's price per share, which now puts the P/E ratio for September 2007 at 17.40, marginally higher than the P/E ratio's long term average of 14.87.

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Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

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