The Dow Jones Industrial Average closed at a new record high on Tuesday, another record yesterday and yet another today – closing at 14,329. But is that really a new record high? While this is certainly an important milestone, it deserves more analysis.
For example, after adjusting for inflation, the Dow is actually lower today than it was in 2000. It is also lower today than at the peak in 2007 on this basis. The Dow will need to rise another 10% or so to hit an all-time high in real, inflation-adjusted terms.
Many other measures that change over time are routinely adjusted for inflation. Let’s take the median family income, as another example. If you didn’t adjust for inflation, you would say the median wage has risen by more than 40% over the past 15 years. But that would be a misleading statement. The fact is that after adjusting for inflation, the median income is roughly the same as it was 15 years ago.
I will admit that most investors don’t think about stock market indexes in inflation adjusted terms, but they should. If you are a buy-and-hold investor, and you were patient enough (and fearless enough) to ride out the last five years, then yes, your stock portfolio may be at or near a new all-time high today. But the purchasing power of those same dollars is not at or near a new high.
And let’s not forget the millions of investors that bailed out of stocks and stock mutual funds in 2008 and early 2009 and never got back in. Or at least not until recently. TrimTabs.com, which tracks inflows and outflows of money in mutual funds and ETF’s, reports that a record $77.4 billion went into these funds in January alone. That blew away the previous monthly record of $53 billion in 2000.
From a contrarian viewpoint, the massive inflows are worrisome, says David Santschi, CEO at TrimTabs. Contrarians figure that the time to leave the stock market is when everyone else is stampeding to get in. Santschi says: “The only really comparable period is early 2000, from January through April. The 2000-02 bear market started in March 2000, when the Dow Jones industrial average plunged 49%.”
But is the current flood of money into stocks a mania? The massive wave of new money into stock funds follows a far more massive withdrawal during most of the bull market, which began in March 2009. From the bull’s inception to the end of 2012, investors pulled $289 billion from traditional open-end equity funds and poured $1 trillion into bond funds, according to the Investment Company Institute (ICI).
The investment public is convinced that as long as the Fed continues QE, currently at the tune of $85 billion a month, then the stock markets will continue to surprise on the upside. And as I wrote last week, Fed Chairman Bernanke made it clear that the spigots won’t be turned off anytime soon. So, we’ll see.
Have a great weekend everyone!
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