When we hear statements like “The dollar is strong,” it’s often based on comparisons to other fiat currencies, such as through the U.S. Dollar Index (DXY). But strength is always relative. When we measure the dollar’s purchasing power against assets like the S&P 500—a benchmark for the U.S. stock market—the narrative changes significantly.
The S&P 500 exposes a key truth: the dollar may appear strong in forex markets, but its ability to purchase real, productive assets has been steadily declining for decades. Let’s examine how the dollar fares when measured against the S&P 500 index.
The Dollar and the S&P 500: A Long-Term Perspective
The S&P 500, composed of the 500 largest publicly traded U.S. companies, is widely considered a reliable indicator of economic growth and corporate profitability. Over time, the S&P 500 has consistently outperformed the dollar due to factors like:
- Inflation: Stocks rise over time as companies increase revenues and adapt to inflationary environments.
- Productivity Growth: Businesses innovate, expand, and increase profitability, driving stock prices higher.
- Monetary Policy: Low interest rates and money printing tend to inflate asset prices, including stocks.
In 1971, the S&P 500 was at around 100 points. By 2024, the S&P 500 is trading at approximately 5,200 points. That’s an increase of over 5,100% in the index value. In other words, the dollar has lost over 98% of its purchasing power relative to the S&P 500 during this period.
The Dollar’s Purchasing Power Decline
To better understand the dollar’s weakness, consider this example:
- In 1971, $1 would have bought you 1/100th of the S&P 500.
- In 2024, $1 buys you only about 1/5,200th of the index.
That represents a 99.98% decline in the dollar’s purchasing power relative to the S&P 500. This reflects not just the erosion of fiat currency through inflation, but also the compounding effect of long-term stock market growth.
Why the S&P 500 Outperforms the Dollar
Several factors contribute to the S&P 500’s outperformance of the dollar:
- Inflation Protection: Stocks generally rise over time as companies increase prices and revenues in response to inflation.
- Wealth Creation: Companies innovate, grow, and generate profits, which drives up stock prices.
- Monetary Policy: Central banks’ policies of low interest rates and quantitative easing have inflated asset prices, including stocks.
Meanwhile, the dollar, as a fiat currency, is continually devalued through monetary expansion and inflation. Holding dollars over long periods results in a significant loss of purchasing power.
Dollar “Strength”: A Misleading Narrative
When people say, “The dollar is strong,” they are typically comparing it to other currencies like the euro, yen, or pound. This comparison, often measured through the DXY, ignores the bigger picture: all fiat currencies lose value over time.
The S&P 500 reveals the dollar’s true weakness as a store of value. While stocks have delivered substantial growth, the dollar has steadily declined. This is especially true during periods of high inflation or loose monetary policy, when asset prices rise while cash savings lose purchasing power.
Conclusion: Investing in Assets vs. Holding Dollars
The dollar’s strength in forex markets may offer a short-term illusion of stability, but its long-term decline is undeniable when measured against real, productive assets like the S&P 500. Over the last 50 years:
- The S&P 500 has risen from 100 to over 5,200 points.
- The dollar has lost over 98% of its purchasing power relative to the index.
For investors, this underscores an essential truth: holding assets, not cash, preserves and grows wealth over time. The S&P 500, representing economic growth and corporate profitability, continues to outperform fiat currencies like the U.S. dollar.
Final Thought
The next time someone claims the dollar is strong, ask: strong compared to what? Measured against the S&P 500, the dollar has steadily lost value, highlighting the importance of investing in productive, inflation-resistant assets for long-term wealth preservation.
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