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Dow Jones Average Return Rate vs. US Inflation Rate: Analysis
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DJIA Return Rate
Simultaneous Change
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DJIA Return Rate
Subsequent Change
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1% Rise in US Inflation Rate over 1 Year
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1% Decline in US Inflation Rate over 1 Year
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What does the table mean?
It indicates that a 1% US Inflation Rate increase over a 12 month period, (from 5% to
6% for example) has typically been accompanied by a 2.26% Dow Jones Industrial
Average Return Rate decline during that year and a 0.10% Dow Jones Industrial
Average Return Rate increase the following year.
It also indicates that a 1% US Inflation Rate decline over a 12 month period, (from 5%
to 4% for example) has typically been accompanied by a 2.29% Dow Jones Industrial
Average Return Rate increase during that year and a 0.10% Dow Jones Industrial
Average Return Rate increase the following year.
The center column shows the change in the Dow Jones Industrial Average Return
Rate over 12 months, depending on whether the period experienced a rising or falling
US Inflation Rate. The right column shows the change in the Dow Jones Industrial
Average Return Rate during the year following an increase or decrease in the US
Inflation Rate.
The data history in the middle column shows a strong tendency for the two
rates to move inversely to each other during the same time period.
The evidence for using the previous 12 month change in the US Inflation
Rate to predict the future direction of the Dow Jones Industrial Average
Return Rate is insignificant (right column).
Annual rates are shown in the graph and calculations.
How Do I Use This Information?
There are many investment theories that are well publicized in the financial press.
Even though little or no historical data may be offered as evidence for such theories,
many investors use them subconsciously, if not intentionally.
Example Theories: Rising Inflation is bad for the Dow Jones Averages. A booming
housing market is good for the S&P 500 stock index. A falling fed funds rate means
that long term interest rates will fall.
There are many such theories. In this site, long term investment and economic data
is tested against decades to determine whether a relationship actually exists or not.
This historical correlation provides a vital aid in interpreting the often confusing
behavior of the financial markets. The perspective gained may be the difference
between staying the course or being blown and tossed by every investment theory
that is popular at the moment. What the majority assumes to be true, often is not. In
the final analysis, readers are admonished to follow the evidence, wherever it leads.
This page tests the relationship between the US Inflation Rate and the Dow Jones
Industrial Average Return Rate. Suppose you are making a business or investment
decision. Suppose again that the decision hinges on whether the US Inflation Rate
and the Return Rate for the Dow Jones Averages tend to move in the same or
opposite directions. The data, graphs, and analysis above will enlighten you. You'll
discover whether they move with, inversely to, or independently of each other.
Suppose that the US Inflation Rate has risen sharply and that you need to know what
direction the Dow Jones Industrial Average Return Rate is headed in the near future.
Does the recent increase in the US Inflation Rate provide a clue about the future
direction of the Dow Jones Industrial Average Return Rate? The data history, graph,
and analysis above will show you how the Dow Jones Industrial Average Return Rate
has performed after increases in the US Inflation Rate. You'll see if one indicator has
been likely to signal a change in another. This is not intended as a prediction, but
merely as a clue to the future from the annals of history. No man knows the future,
unless he has the ability to control the future.
This site compares data series for interest rates, stock indexes, economic indicators,
currency exchange rates and real estate values. Suppose that you want to see how
stock indexes are influenced by interest rates or the value of the dollar. Click one of
the stock index links on the right side of any page. Links to our multi-series graphs
and correlation analysis may be found at the bottom-center of the stock index pages.
Formula for periods with a rising US Inflation Rate:
1) Change in the Dow Jones Industrial Average Return Rate DURING periods with a
rising US Inflation Rate:
The abbreviated formula is: (Dow Jones Industrial Average Return Rate Change / US
Inflation Rate Rise) x 1% = Published Rate.
The complete formula is: [(Average change in the Dow Jones Industrial Average
Return Rate over all rolling 12 month periods with a rising US Inflation Rate) /
(Average Rise in the US Inflation Rate over the same 12 month periods)] x 1% =
Published Rate.
2) Change in the Dow Jones Industrial Average Return Rate AFTER a rising US
Inflation Rate:
The abbreviated formula is: (Subsequent Dow Jones Industrial Average Return Rate
Change / US Inflation Rate Rise) x 1% = Published Rate.
The complete formula is: [(Average change in the Dow Jones Industrial Average
Return Rate during the 12 months following any rolling 12 month base period with a
rising US Inflation Rate) / (Average Rise in the US Inflation Rate over the 12 month
base periods)] x 1% = Published Rate.
Formula for periods with a declining US Inflation Rate:
1) Change in the Dow Jones Industrial Average Return Rate DURING periods with a
declining US Inflation Rate:
The abbreviated formula is: (Dow Jones Industrial Average Return Rate Change / US
Inflation Rate Decline) x -1% = Published Rate.
The complete formula is: [(Average change in the Dow Jones Industrial Average
Return Rate over all rolling 12 month periods with a declining US Inflation Rate) /
(Average decline in the US Inflation Rate over the same 12 month periods)] x -1% =
Published Rate.
2) Change in the Dow Jones Industrial Average Return Rate AFTER a decreasing US
Inflation Rate:
The abbreviated formula is: (Subsequent Dow Jones Industrial Average Return Rate
Change / US Inflation Rate Decrease) x -1% = Published Rate.
The complete formula is: [(Average change in the Dow Jones Industrial Average
Return Rate during the 12 months following any rolling 12 month base period with a
declining US Inflation Rate) / (Average decline in the US Inflation Rate over the 12
month base periods)] x -1% = Published Rate.
Rolling 12 Month Periods Defined:
Overlapping 12 month periods in a monthly data base.
For example:
In the 24 month period included in 2000 - 2001, there are 13 complete rolling 12
month periods. The first is January, 2000 - December, 2000. The second is February,
2000 - January, 2001. The third is March, 2000 - February, 2001 and so on. The last
complete rolling 12 month period in the 2000 - 2001 period is January, 2001 -
December, 2001.
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