Will the real market history please stand up?

As a follow-up to a prior missive.....everyone knows of this chart (the progess of the DJ 30 in nominal terms, log scale):


Here's another chart:

(in log scale)

The above chart is the DJIA (monthly close) divided by the monthly CPI (CPI-U average of all US urban areas), ie the real/inflation-adjusted DJIA (ex. reinvested dividends).

Notice how from 1966 to 1982, a period of market consolidation in the nominal chart, the DJIA DECLINED in real terms (ex. dividends) due to the rampant inflation c. Vietnam War/OPEC shocks. Naturally the inclusion of dividends changes the investment return over time (see "The Triumph of the Optimists" or Jeremy Siegel's Stocks for the Long Run). Yet the message is clear....stock returns have far outpaced inflation since 1982. However, the "market" (as poorly represented by the DJIA) can decline IN REAL TERMS (not merely consolidate) for years and stocks held for "the long-term" can undergo severe drawdowns.

Is 1999 = 1966? Probably not. Is 2006 = 1982? Probably not.

However as 2006 unfolds, an open mind must consider ALL possibilities, both good and bad. FYI, assuming DJIA/CPI returns to 1966 levels (an absolute worst case scenario) DJIA = 5800. Ouch.

Bottom line: Break of October 02/March 03 lows will be very, very bad. Hopefully, 2006 will see a bullish cup/handle break upwards.