Corrected for Stuff, the Dow Sucks

Daniel Gross has caught the Republicans lying again. It turns out that the GOP is claiming that the Dow is at some sort of all-time high. While this is true in the sense that it’s factually correct, Gross objects to the GOP talking point because the Dow is atypical and Republicans aren’t adjusting for inflation.
I should add that since Gross’ argument involves the stock market and Republicans, he unfortunately has to continue his bizarre Dow 36,000 fixation—to wit, D36K must be mocked in any article dealing with the market no matter how tangential it is to the article. For other instances, see here, here, here, here, here, here and…oh, you get the point.
As to the Dow being atypical, I agree, it’s a lousy benchmark, but seriously…it’s not that bad. Combined, the 30 Dow stocks are worth about $4.1 trillion. That’s a pretty big slice of the market, and it’s fairly well diversified. The S&P 500’s $12.5 trillion is obviously much better, but the Dow isn’t coming totally out of left field, or in this case, right field. We can go even larger and look at the Wilshire 5000 which weighs in at $16.7 trillion.
Of course, there’s nothing special about the Dow 30. The stocks are simply selected by the editors at the Wall Street Journal, and those folks never make a mistake. Well, rarely. For example, Homer nodded bigtime in 1939, when the editors purged IBM from the index. The stock was eventually invited back in 1979, but over those 40 years, IBM gained 22,000%.
What would have happened if the editors had left IBM alone? The Dow would have cracked 1,000 in 1961 instead of 1973, and it would be over 16,000 today. (By the way, did you know there’s a book called Dow 36,000? How fucked up is that?)
While the Dow is at a new high, the S&P 500 is still 9% off its all-time high, and the Wilshire 5000 is 5.5% below its high. But Gross goes on to say that, “the claim that ‘the stock market’ is at an all-time high simply doesn’t match most investors’ experiences.” That’s not quite correct. If we consider most investors experience to be the broadest index, and include dividends, then the Wilshire 5000 is at a record. True, only 4.3% higher than its March 2000 peak, but it’s there. Also, the Dow’s period of outperformance ended more than four years ago. The bull market has been very kind to the broader indexes.
As to the inflation charge, it too is correct, but we have to watch ourselves. First, the government’s measure of inflation is notoriously poor. Also, once we open up the adjusted argument, it can go on and on. Soon, someone will say that the market should truly be measured against gold, or a basket of commodities, or other currencies. Any market index can be adjusted down by a clever analyst.

Posted by on October 27th, 2006 at 6:17 am

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