Comparison of performance between NYSE, DJI, S&P 500 and NASDAQ since 2009
After publishing my predictions of the S&P 500 and the NASDAQ I looked at performances. In order to compare the performance of these indices I had to normalize them. This meant that I used the price at January 2009 and plotted the ratio of the current price to that of January 2009. For example if the price on January 2009 was 2000 and the price at a later date, say March 2010 was 2200 then that ratio would be 2200/2000 = 1.1. This means that the figure x3.68 in the chart below indicates the final price on December 2017 was 3.68 times the price on January 2009.
This makes it much easier to compare different indices as shown in the chart below.
NASDAQ gave the best performance during this period.
One would notice that investing in January 2009, close to the bottom of the market, would provide us with an equivalent 10% to 15% return on investment per annum.
Comparisons of DJI, NYSE, S&P 500 since 1985
Having done the chart above I decided to look at a longer term performance. That is invest in January 1985 and keep the stock until end of 2017. The chart shows how each of the indices performed.
DJI gave the best performance during this period. The DJI performed at an equivalent of a bank interest rate of 12%. The S&P 500 performed as an equivalent bank interest rate of 11% and the NYSE performed at 10% per annum.
The American stock indices versus interest rates
I obtained the interest rate data from the St. Louis Fed Reserve - https://fraser.stlouisfed.org/. Let me explain that in order to draw the volume traded curve on the same axis as the S&P 500 index I had divided the volume traded by 50,000,000. This means that the 1000 mark is actually 50,000,000,000 trades.
I looked at prime interest, S&P 500 price and volume traded trend over the 30 years. It appears that interest rates did not have much impact on the S&P 500 index.
The initial impression is that high interest rates does dampen the S&P 500 height. When the interest rates were as high as 8% or more the S&P 500 was below 500. This was probably because high interest rates encouraged people to save money instead on risking their savings on stocks and shares. This, I believe, was before the internet existed.
Looking at the data one can observe that after August / September 2004 the S&P 500 climbed very high even though interest rates were climbing too. This would indicate that interest rates played a minor role in the performance of the S&P 500.
So I looked at the volume traded figures. It is most likely the internet boom and easy access to trading by many internet brokers and the speculative frenzy in America that caused the S&P 500 to reach historic highs before the crash of 2008. Remember those were the days when everyone was flipping houses, some as many as 5 houses at a time. Many got into 'money making' schemes by trading through internet trading houses. Those who did not know how to trade installed software that automatically trades for them. One of my friends claimed that he was earning 10% per annum with these automatic trading software. The trading volume went up from 100,000 to 1,000,000,000 range prior to 1980 to 30,000,000,000 after 2014 and peaked at 160,000,000,000 in 2009. This shows that after 2004 there was a huge demand for shares. This enormous demand would have made shares prices climb without any inhibitions.
Personally I doubt that raising interest rates would make the S&P 500 drop as the demand for shares is extremely high. Just image that if each trade was taxed by US$0.01/- (1 cent) the countries debt could be paid off within a year? The excess funds could be used to provide free health care for all and a new air force.
This article was researched and written by Dr. Peter Achutha, 10th February 2018