3 Graphs to Understand the Dow's New Record High
Mar 9th 2013 7:00PM
Updated Mar 10th 2013 10:45AM
If you pay even the slightest bit of attention to the stock market, you will have heard by now that the Dow Jones Industrial Average finally beat its October 2007 all-time nominal high this week (the qualifier is important; more in a moment). Leaving out the fact that the price-weighted Dow is a flawed index (the broader, capitalization-weighted S&P 500 is less than 1% from its 2007 high), is there any real significance to this milestone?
Well, for one, it's good reminder that, although the U.S. stock market has been a remarkable wealth-creation engine over time, it periodically suffers long periods of stagnation; both of these characteristics are clearly visible in this chart of the Dow's full history (the scale is logarithmic, and the vertical grey bars indicate recessions):
The massive decline the stock market suffered at the height of the credit crisis in the fourth quarter of 2008 and the first quarter of 2009 is clearly visible in the upper right corner of the graph. That decline was severe enough that it has taken the Dow nearly five and a half years to get back to its October 2007 high. Or did it? The following graph, which shows Dow values on an inflation-adjusted basis, beginning in 1999, tells a different story:
Once inflation is accounted for -- and make no mistake about it; inflation is a cost -- not only has the Dow not recovered its 2007 high, but it remains below levels established in 1999! That's terrible news for long-term investors. Thankfully, that isn't the end of the story, for capital gains aren't the only source of returns for equity investors. What about dividends? Inflation is a cost, but no one should ignore dividends in tallying returns. Here's what the Dow chart looks like, including dividends and after inflation, from 1999 onward:
As the chart shows, the 2000s were undoubtedly a tough decade for equity investors, but they were no "lost decade" -- even in real terms.
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The article 3 Graphs to Understand the Dow's New Record High originally appeared on Fool.com.Fool contributor Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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