A critical factor for the reliability of a regression analysis of stock prices over many decades is the accuracy of the inflation adjustment. The Bureau of Labor Statistics (BLS) has been actively tracking inflation since 1919 and has estimated inflation rates back to 1913 using data on food prices.
In 1982, however, the BLS began incorporating changes to the Consumer Price Index (CPI), which is used to calculate inflation. These changes have resulted in much lower "official" inflation rates than would have been the case if the method of calculation had remained consistent.
At his
www.shadowstats.com website, Economist John Williams publishes an "Alternate CPI" employing the earlier BLS method. let's take
another look at the S&P Composite, this time adjusted for inflation
since 1982 using Williams' Shadow Government Statistics. The change is astonishing. The adjustments to post-1982 data alter the slope of the regression that impacts the variance from the trend across the entire time frame, dramatically so in the last two decades. With this adjustment, the S&P 500
has been below trend since 2002. The current bear market has dropped the monthly average index price 50% below the trend, which puts us in the territory of those secular market troughs [
previous secular bears].
My opinion is that the optimum method for calculating consumer prices is somewhere between the revised BLS method and the historic method preserved by Williams. But for a long-term regression analysis, consistency is essential, which lends some credibility to the alternate CPI chart as an indication of the current index price relative to previous troughs.
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