The Market May Have Finally Hit a Real Record, But It Could Be a Problem

It’s been a splendid run for the market — so emphatically great that in just the first three months of the year, the S&P 500 climbed to record highs on 22 separate days.

Most people who have looked at their stock portfolios this year have had the pleasant experience of seeing increases in their holdings, and countless news reports and analyses from financial gurus have talked optimistically about the market’s powerful upward momentum.

But what most reports and commentary haven’t pointed out is that because inflation has also climbed sharply over the last few years, the value of stock prices has eroded, along with nearly everything else in the economy. When you factor in inflation, the stock market did not actually reach new heights.

That’s finally changing, with the market’s gains outpacing the ravages of inflation sufficiently to push real stock valuations close to a new peak, according to calculations by Robert J. Shiller, the Yale professor and Nobel laureate in economics. In a phone conversation, he said, “On a monthly, inflation-adjusted basis, it does appear that the S&P 500 now is right around a record high.”

Professor Shiller can’t be more precise for another month or two because the Consumer Price Index is calculated retrospectively, while stock prices are virtually instantaneous. On his Yale website he posts monthly inflation-adjusted stock, bond and earnings data. The last inflation-adjusted peak for the S&P 500 was in November 2021.

We’re certainly close to that inflation-adjusted peak — or may have already reached it — and that’s a big deal. It means that the market is, at last, starting to make real records, pulling stock returns ahead of the eroding effects of inflation.