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October 4, 2006
DOW Hits New High -- Unadjusted for Inflation, That Is
Adjusted for inflation, however, the DOW continues to lag well below its January 2000 high-water mark. In 2000-dollars, yesterday's DOW close equals about 9,900. To get us even with January 2000, the DOW needs to hit about 13,880 this year.
Also, the S&P 500-stock index closed Tuesday at 1334.11 -- still, even unadjusted for inflation, below its 2000 high of 1527.46. And even worse is the Nasdaq composite index, which closed yesterday at 2243.65 -- less than half its 2000 peak of 5048.62.
We still have a long way to go to get back to the "Roaring '90s". As good as the unadjusted DOW numbers appear on the surface, the lagging NASDAQ and S&P 500 numbers, particularly NASDAQ, should raise serious concerns. Why? Because unlike the DOW's bluechip stocks, the NASDAQ typically is composed of stocks of smaller companies and especially technology companies. These are the kind of companies that keep America's economy growing.
So, given the NASDAQ's current level, what's the market saying -- and these are global traders here -- about their longterm view of America's economy? Maybe not so good, eh?
UPDATE (revised):[My update is based on what may be a misunderstanding of the point made by the commenter whose observation follows. I have asked the commenter for clarification.] One commenter said this: "So, either the market is in the most extreme bubble in 80 years, or the economy is 'not so good'? You have an unusual definition of not so good." Perhaps the commenter is not concerned that real wages -- that is, current wages adjusted for inflation -- have performed miserably since 2000. It seems the commenter is measuring the U.S. economy's overall performance by how the DOW is doing. As the adjusted numbers show, the DOW remains below its 2000 high.
UPDATE II: From the commenter whose post I didn't quite understand: "All I wanted to say was that I don't think that the NASDAQ (or DOW)'s being below 2000 level is an anyway a reason for economic concern. I'm primarily objecting to your one sentence about that. I'm not claiming that the economy is great, and I would agree entirely that real wage growth is a big problem, as are the trade and budget deficits and the housing bubble. . . . " I commend to you all the rest of his very thoughtful comment.
UPDATE III: Here's an inflation-adjusted chart of the DOW since 1925 to the present (prompted by one commenter's suggestion).
Posted by shertaugh at October 4, 2006 8:19 AM
Comments
So, either the market is in the most extreme bubble in 80 years, or the economy is "not so good"? You have an unusual definition of not so good.
Posted by: DK at October 4, 2006 11:10 AM
Actually, I think you were the one who invoked the NASDAQ level as a "view of America's economy" that was "not so good."
I considered also saying that the main criticism of the US economy's health has to do with real wages (which is a real substantive point), not with the DOW or NASDAQ (which are doing quite well by historical standardards, not the best ever, but quite well due to the ever-increasing share of corporate profits in GNP). But that seemed to be a little off topic, and I've been trying to work on making my blog comments shorter and more on point. I guess I made the wrong call on that!
[Shertaugh: Forgive me, but if I've misunderstood the thrust of your comment, then by all means, please clarify and I'll post it in the body. My impression -- and again, maybe I misunderstood, was that you were measuring the economy's performance by the DOW's. Please help me out here because I want to understand exactly what you're saying.]
Posted by: DK at October 4, 2006 2:07 PM
Hello, thanks for your nice response and invitation to clarify.
All I wanted to say was that I don't think that the NASDAQ (or DOW)'s being below 2000 level is an anyway a reason for economic concern. I'm primarily objecting to your one sentence about that. I'm not claiming that the economy is great, and I would agree entirely that real wage growth is a big problem, as are the trade and budget deficits and the housing bubble.
To elaborate more specifically on my disagreement, first, I think that stock markets being at crazy bubble levels are actually harmful to the economy's long run health, since they lead to lots of money being wasted on really dumb ideas. Same for the housing bubble -- we will pay a price for having too many people flipping houses and others priced out of the market.
Second, I don't really agree that the NASDAQ companies are especially good-for-America. You are right they provide a lot of economic growth, but, one reason real wages aren't doing so great is that a lot of the benefits of NASDAQ-led growth are going only to highly skilled technology workers and not to the broader population; some of the problem with real wages is due to lower-tech and older industries getting moved overseas.
Third, the stock market only represents the corporate share of GNP. There are many things that would be good for consumers and workers that might not be as good for the stock market. Allowing the government to negotiate prices for prescription drugs would be a clear short-term win for consumers, but would really hurt NASDAQ biotech.
cheers,
DK
Posted by: DK at October 4, 2006 4:35 PM
A couple of points:
1) the economy is 1/3 larger today, adjusted for inflation, than when the DOW hit the high point in 2000. 1/3 in 6 years isn't bad.
2) the upward movement in the DOW is more broad-based today compared to 2000, when it was led by a subset of tech stocks (hence the 'tech bubble').
3) And finally, median wages have been flat over the last 40 years or so, excepting the late 90's. While we all want median wages to go up, it's not the norm.
Posted by: Steve White at October 4, 2006 9:30 PM
If we are to adjust for inflation shouldn't we examine the Dow from past decades through the same lens? I would be interested in an inflation adjusted graph instead of the usual absolute numbers graph.
Posted by: mike miller at October 5, 2006 9:10 AM
A few points...
1) The NASDAQ at 5000 was a complete bubble aberration. Look at the NASDAQ chart for the past 10 years or so. Slice off the bubble part, and it looks more normal. You can't say "we're not near 5000 so we haven't recovered" because 5000 does not represent a normal market condition or valuation. If we hit 5000 again in the next few years, I'd be worried.
2) Average wages have little to do with the stock market level. Profits do. And profits are up the past few years partly due to profits being increased at a faster rate than wages.
3) Something seems odd about the inflation adjusted Dow chart to me. Maybe it's just that I'm not sure I accept the premise, and I'm also not sure whether the Dow takes dividends into account.
4) Tracking any index over a long period of time is misleading. Every few years stocks are rotated out of an index, to be replaced by others. Is it Google that will go from the NASDAQ next year? Of course not. It will be "East Groton Black and White Television Co. (Ltd.)" or some other such titan of tecnology and profits past. Indices are biased upwards. Though I guess that is representative of average current holdings.
5) As long as the prospect for interest rates remains reasonably low, current valuations are not particularly unreasonable. I hate to say that, really. But things aren't that out of whack unless you believe the dollar will collapse in the next couple years. I keep thinking that's around the corner, but it never seems to happen at a pace that would really spook things. OPEC still prices in dollars, right? And while there is some movement away from dollars in Asia, they are stuck with way too many of them to start a "pyrotechnics on stage gone bad" stampeed for the currency doors.
6) Housing could be our undoing, but until the rich start foreclosing, I'm not TOO worried. Housing prices haven't gone down enough yet to bring consumer spending to a halt. And stock market cash should counter some. But this could be our undoing if it gets bad.
7) Maybe the market is factoring in the incredible improvements to our governing situation by an imminent takeover of Congress by the competent and more frugal Democrats?
Posted by: K at October 5, 2006 5:21 PM