The Dow Is Not at an All-Time High
On this blog we have quite a bit of commentary on the media and journalism. Often this is to discuss the over- or under-coverage of specific events and/or the spin given to said stories (see shiny object theory). However, today I would like to discuss an outright incorrect story. The story under question is today's "Dow surges past 13,000 for first time."
In a strict sense, the headline is correct. The Dow indeed today closed above 13,000 today for the first time. But that statement should immediately give pause. Remember in junior high math class when your teacher would deduct points for not "labeling your units"? Well, it seems that most financial reporters have forgotten this lesson. The Dow closed above 13,000 what for the first time?
A more important point is one that I raised about a year ago. While in nominal terms the Dow may be above 13,000 for the first time and at an "all-time high," this is not true in real terms. The Dow peaked at 11,722.98 in January of 2000, which is equivalent to 14,261.48 in March 2007 dollars. This means that over the last seven plus years, the Dow is down 8.7%. Of course, very few of us ever perform as well as the broad indices, and note that the broader S&P 500 is down over the past seven years even in nominal terms (down 18.8% in real terms). As far as being above 13,000, the Dow was above 13,000 (in real terms) for much of the period from April 1999 to January 2000, crossing that mark again several times, including as late as May 2001.
There really is no takeaway lesson from this, other than always inflation-adjust numbers and beware of financial news from websites littered with advertisements from investment companies.
"very few of us ever perform as well as the broad indices" -- does this
belie a belief in the concentrated sucess of a few very successful owners
of stock, because on average we all do as well as the market...
Yes, I am suggesting that a small proportion of investors are usually
coming out ahead. Furthermore, I should have clarified: once brokerage fees
and capital gains taxes are included, your return is diminshed further. And
as I believe we economists all know, capital gains are calculated on
nominal stock values.
So you're saying that, seven years later, the Dow is
still down?
It's not fair to adjust the DOW by the CPI but not account for dividends.
Jeff: Your comment is appreciated and I did in fact overlook dividends. Can
you suggest a way to incorporate this into a
dividend-and-inflation-adjusted Dow?
Well the dividend yield right now is 2.1%. I'm not sure where you can find
the historic information online (besides google) - but just pretend you
reinvest dividends every year before you adjust it by the CPI at the end.
(I use bloomberg and the dividend yield has been between 1.25% and 2.5%
since 1999)
Thanks, Jeff. I'll work on trying to include the dividend yield into my
adjustments, once (if) I find some historical data. And I'm in total
agreement about this overemphasis on the Dow Industrials, which is part of
the whole reason for me blogging on this topic in the first place.