Yahoo can even graph the series since Nevertheless, to study the real profitability of the market, we need to average and graph not only the price, but the effect of dividend distributions and inflation as well. That is the purpose of this work.

If we are to analyze the historical profitability of stock investments, this portion cannot be neglected. Therefore, it is of interest to graph and average the total return meaning the increase in value if all dividends were reinvested instead of the evolution of price.

The orange curve shows the result of having all dividends reinvested i. As can be seen, reinvesting all dividends produced about 8 times the return.

Note that the y-axis is logarithmically scaled, for better appreciation of the earlier trends. To evaluate properly how much can be earned through stock investments in a long period of time, the effect of inflation has to be extracted from the picture , by adjusting the intermediate results according to an index such as the Consumer Price Index published by the U.

The following graph shows inflation per year, together with annual dividend distribution rates. Some interesting trends can be seen in both:. As we observe in the graph, in recent years the stock market delivers more of its profits through capital gains.

Average Stock Market Return: Where Does 7% Come From? - The Simple Dollar

You can also see the high inflation rates that occured in the s. Incorporating inflation data to historical total returns and relative prices produces the following inflation-adjusted graph:.

Is There a Correlation Between Inflation and the Stock Market

As can be seen, the stock market was very profitable, in real terms, in the to and to periods. On the other hand, it didn't perform well from to , and neither it did for the last decade. Still, during these periods, it partially worked as a shelter from inflation.

Geometric averages were calculated for price changes, total returns and inflation. Raw data for this work was obtained from the following sources:.

Receive our new articles by email. Creative Commons Attribution 3. Total and Inflation-Adjusted Historical Returns. SECTIONS Total Return Inflation and Dividend-Distribution Trends Inflation-Adjusted Data Annual Averages per Decade.