What Postage Tells Us About Inflation

July 17, 2015 is the 40th anniversary of the linkup between America and the Soviet Union in outer space. This was an amazing feat back in 1975, considering the Cold War had not yet even ended; rather it marked a bold step by two global adversaries, willing to dock two space crafts in outer space – and to pursue the common quest for understanding of ourselves, and the planet we all inhabit.

This is the stamp that commemorated the event – note first class postage in 1975 was 10 cents. Today at 49 cents, this change in price illustrates inflation as measured by the Consumer Price Index, or the CPI. Essentially what this says prices are up 4.4 times over that 40 year period, an easy, simple illustration of inflation.

To merely maintain purchasing power over the past 40 years, your income and capital values would need to have risen by 4.5 times. So one might ask: “what did the large companies in America – illustrated by the S&P 500* – do during that time? How effective were investments in this area at holding, protecting, or even increasing your purchasing power?

First, the price of the S&P 500 on July 17, 1975 was 93.63. Today, it’s about 2,100 or about 21 times higher.

Second, let’s look at the earnings of the Index, which are a measure of how well companies perform for owner/investors. In mid-1975, earnings were about $8.00/share; the current consensus of earnings by LPL and FactSet Research is about $125.00/share – up close to 16 times.

Third, let’s look at dividends, which are what shareholder/owners receive from companies they own. The dividend in 1975 was a little less than $4/share. We believe the dividend this year will probably end up in the $44/share area for the S&P 500 – an increase of about 11 fold.

In summary:

S&P 500 from 1975 to 2015	Up ______ fold
Capital Value	21
Earnings	16
Dividends	11
Consumer Price Index (Inflation)	4.4

In our view, the financial media, which frankly look more like “financial drama” to us, tend to ignore any historical perspective or facts. I think this has led the average investor to be way under-invested in equities – even after tripling in value since 2009, in the past six years.

We have come a long ways in the past 40 years. And in our opinion, the next 40 look even more promising. Innovation cannot be kept in a bottle. Like a radioactive material it compounds upon itself. Inflation can act the same way, slowly eroding your purchasing power.

A 40 year-time frame carries additional importance as well. If an investor or couple were to retire at age 60, there is a high likelihood that at least one of the two will live 40 years. With life expectancies increasing as they have over the last four decades, living on retirement income for 40 years may not be unusual.  The question will be, will the purchasing power of your income have the same longevity as you?

We welcome a conversation with you on this very topic.