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Source link: http://archive.mises.org/5827/no-the-stock-market-did-not-reach-a-new-high/

No, The Stock Market Did Not Reach A New High

October 30, 2006 by

I noticed this reality last week and now Slate has done some of the leg work to tease out some of the facts:

“Dow 12,000 quickly became a Republican talking point. On Oct. 19, Dick Cheney boasted that ‘we’ve got all-time record highs on the Dow Jones Industrials again today.’ Earlier this week, White House flack Tony Fratto noted that ‘we’re seeing record highs in some of the markets, and that tells us, and we think it tells Americans, that there is a great deal of confidence in our economic future.’

…For starters, the Dow’s success does not mean that stock-market investors in general are thriving, because the Dow does not well represent the whole market. The Dow has a long and distinguished history, and remains the most popular shorthand for the performance of the stock markets. But as an overall stock-market proxy and investment tool, it’s an also-ran. The 30 stocks in the Dow Jones industrial average are huge, important, and widely held. But the index only accounts for less than one-quarter of the market. And because of its weighting system, the performance of a few stocks can have a disproportionate impact. In late September, blogger/money manager Barry Ritholtz broke down the performance of the individual Dow components since January 2000. The numbers show that a) most components are still way down from their peaks; and b) the torrid performance of a handful of stocks accounted for most of the index’s gains.

And serious investors don’t even use the Dow as much of a benchmark. According to Dow Jones, between Exchange-Traded Funds, mutual funds, and other products, ‘more than $47 billion’ is invested in assets tied directly to the index. That’s a tiny figure. The S&P 500, whose constituents represent 80 percent of the overall market, is a much more accurate gauge of general market performance. According to Standard & Poor’s, some $1.26 trillion in assets is indexed to the S&P 500. Its breadth likewise makes it a much more popular benchmark for investors of all kinds. And when you look at the S&P 500, it’s clear that the stock-market recovery is not as broad as the Republicans would like you to think. Though it has recovered substantially from its 2002 low, the index is still off nearly 10 percent from its 2000 peak. As for the tech-heavy Nasdaq 100, which has about $186 billion indexed to it, it would have to nearly triple in order to set a record high. So, the claim that ‘the stock market’ is at an all-time high simply doesn’t match most investors’ experiences.

What’s more, 12,000 doesn’t really even represent a record high for the Dow. In absolute numbers, the Dow is higher than ever. But thanks to inflation, a dollar today isn’t worth what a dollar was several years ago. That’s the difference between nominal returns (how much you make on an investment before adjusting for inflation) and real returns (how much you make after adjusting for inflation). In real terms, the Dow is still nowhere near the peak it hit several years ago. The handy inflation calculator supplied by the Bureau of Labor Statistics shows that $12,000 of goods and services (or stocks) in today’s dollars buys you only $10,184 of goods and services (or stocks) in 2000 dollars.”

I also enjoyed the dig at James Glassman and Kevin Hassett’s book.

{ 12 comments }

Pete Canning October 30, 2006 at 7:47 pm

I am not sure what you or slate are trying to get at here.

Ben October 30, 2006 at 7:55 pm

I think the point is that using the DJIA to measure genuine economic health is like to using the CPI to measure genuine inflation.

Ohhh Henry October 30, 2006 at 8:23 pm

Speaking of the CPI, if you meaure ‘the stock market’ (let’s say, S&P 500 since it’s a more broad sample than DJIA) against the CPI, does it say anything really wonderful about ‘the economy’?

And keep in mind that CPI is a number that significantly understates inflation (see Shadow Government Statistics).

If you chart the S&P500, or the DJIA for that matter, deflated by the more realistic price index calculation determined by the Shadow Stats people, I wonder if it would indicate a decline in the markets rather than an advance.

That kind of chart (say, for 1yr and 5yr intervals) would be a nice addition to the Mises markets pageM.

Pete Canning October 30, 2006 at 9:38 pm

Those “shadow stats” are fairly absurd. Anyone who claims that inflation 10% every year is not living in the same world I live in.

There is no reason to make absurd statements in order to disparage the government when it is so easy without resorting to such.

Ohhh Henry October 30, 2006 at 11:18 pm

The Shadow Statistics CPI methodology is described here. If you have any specific comments and criticisms they would be appreciated.

Here is the heart of their argument:

“The BLS publishes estimates of the effects of major methodological changes over time on the reported inflation rate (see the “Reporting Focus” section of the October 2005 Shadow Government Statistics newsletter — available to the public in the Archives of http://www.shadowstats.com). Changes estimated by the BLS show roughly a 4% understatement in current annual CPI inflation versus what would have been reported using the original methodology. Adding the roughly 3% lost to geometric weighting — most of which not included in the BLS estimates — takes the current total CPI understatement to roughly 7%.”

adi October 31, 2006 at 10:05 am

Don Robertson, your post had so many fallacies concerning stock market that it’s difficult to start correcting these.

Fritz Machlup’s analysis would be the first place to start; Machlup on Stock Market and Capital Formation

billwald October 31, 2006 at 12:11 pm

There will always be winners and losers. The averages are mostly psychological.

When the DJA was first introduced the transportation list was larger than the industrials. Back then the chosen stocks represented real assets. Now days reading the market lists is more like checking lotto numbers in the game of “my computer can guess faster than your computer.”

Tom Rapheal November 6, 2006 at 7:27 pm

Don,

I think…

Don you fail to understand what the stock market is (captial investment organizer) and that the money is not held by the companies, it is invested on stuff (trucks, macines, buildings, ect) If these plans fail then the investment value falls and the stock loses value. It is not like poker at all because it is not a zero sum game. Absolute value can be added without new investments. I will admit that sometimes there is stealing but this is quickly eradicted by sending the offenders to jail.

If the S&P is not static , who cares. If it changes stock, it dosen’t change the situation of the investor other than the performance with the stock. Of course it tries sells the losers and buy winners. The S&P 500 is a conglomerante of the stocks made out of the stocks thought best by the people that run the S&P. Should have they retained the same stocks they started with? In thatc ase I think that the S&P would be around 0.

Also, not everyone loses money in the stock market, and many people make money. I belive that in a non Fed run economy that most people would make money on the capital investmant organizer (stock market)

P. S. Poker is much smarter of a choice than the lottery because of better chances to win

Humbly posted by a youngster

M E Hoffer November 6, 2006 at 10:03 pm

Tom,

And other Grasshoppers about, both young & old.

This piece in re: “The Stock Market”, puts a ray on a story long bubbling in the depths, not oft called to the surface.

http://www.businessjive.com/nss/darkside.html

Mike D. November 19, 2006 at 2:26 pm

Justin:

You forgot to take into account dividends and dividend reinvestment. Although S&P 500 stocks do not pay high dividends, the effect is not negligible over a long time period. On a pension fund, which can reinvest tax deferred, a 3% dividend will double the investment over about 24 years (using the rule of 72). However, over a 6 year period, the amount is problably between 18 and 20%. You can check on Barra or S&P to get the exact numbers.

Maryam December 8, 2006 at 7:19 am

i did’nt get yu,explain it further…..a response by a student

scott August 3, 2007 at 6:05 pm

“I will admit that sometimes there is stealing but this is quickly eradicted by sending the offenders to jail.”

“In addition to cancelling the redemption of dollars into gold, Roosevelt in 1933 committed another criminal act: literally confiscating all gold and bullion held by Americans…”

http://mises.org/rothbard/moneyback.asp
http://www.googlesyndicatedsearch.com/u/Mises?hl=en&submit.x=0&submit.y=0&q=gold%20confiscated

golly, what happened?

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