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Megan McArdle writes:

I'm surprised to see Mark Kleiman linking to this piece of silliness, which purports to "prove" that the Dow has fallen by 20% since GWB took office. Says Mark, "Turns out the "ownership society" hasn't even been good for the owners."

This little treasure comes from a website hilariously titled "Just the Facts", and achieves this result by using a market-weighted basket of global currencies. This is--what's the word I'm looking for? Right, right, utterly daft. Americans don't buy things in a market-weighted basked of global currencies. They shop in dollars. And we have a perfectly good mechanism for calculating the value of the Dow in dollars; it's called "inflation adjustment". The inflation-adjusted value of the January 2001 Dow in today's dollars is about 12,200; today's level is unambiguously higher.

But what about foreigners? I hear you cry? What about 'em? They hold almost no stocks--about $200 billion on a total market capitalization1 of 17.75 trillion.

What about the amount of foreign goods you can buy by selling your stocks? Trade is a relatively small part of the United States economy, and much of it is with places like Mexico and China, whose currencies haven't really altered much against ours. (To be fair, a lot of it is also with Canada and Japan, that have seen higher currency appreciation). Moreover, many of those places have dropped the prices of their goods and taken lower profits rather than lose sales volume. That's why, you may recall, everyone's complaining that our trade deficit is failing to adjust. Overall, the effect of the currency decline on the purchasing power of your stock investment is exceedingly modest unless you planned to blow every dollar on Paris vacations and BMW automobiles.

Her larger point is right, but I wouldn’t say that the Dow is “unambiguously higher.” The Dow Total Return Index stood 15,065.68 on January 19, 2001. Yesterday, it closed at 20,152.59. That’s a return of 33.76%.

From December 2000 to December 2007, the CPI increased by 20.71% (I don’t have the January-to-January numbers yet). That works out to a total real return of 10.81%, or 1.48% a year. That ain’t great, but it’s in the black.

Megan does a better job than me of trashing the lame Dow-in-euros argument. (I’ve tried to make a few times before.) I get paid in dollars not euros or gold or whatever. This Dow performance stat falls into what I call the “Daniel Gross/Larry Kudlow Law,” which states that you should never use financial market stats to backup a political argument. The financial markets are surprisingly apolitical.

If we were to measure from the start of the war, the stock market is much higher. Does that justify the war?

You can always come up with some commodity that has outperformed something else at some starting point. But the long-term evidence is crystal clear—common stocks outperform everything else.

If have a market for over 70 years, you’re going to have something that’s called the worst crash in 70 years. If you measure from the top of that market, it doesn’t prove anything except that markets are volatile, and I already knew that.

Posted by edelfenbein at January 18, 2008 4:21 PM