Psst -- the Dow Is Still 8% Below Its 2007 High

We finally got there! Stocks put up solid gains today, as the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) added 1% and 0.9%, respectively. That was enough to put the Dow past its previous all-time closing high of 14,164.53, which it achieved on Oct. 9, 2012 -- in nominal terms, anyway.

The S&P 500 is now within 2% of its all-time high, which it achieved on the same day. Incidentally, if you're wondering about small-cap stocks, they surpassed their 2007 high back in April 2011 -- the Russell 2000 Index now sits 8.4% above its July 2007 high.

The VIX (VOLATILITYINDICES: ^VIX  ) , Wall Street's fear gauge, fell nearly 4% to close below 13.5. Few investors want to protect themselves against declines when the market is making new highs -- little wonder the VIX is back at rock-bottom levels. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

Don't forget the inflation gremlins
Financial journalists typically report growth and returns on a nominal basis (i.e., before inflation is accounted for), except where someone does the work for them, such as when the Bureau of Economic Analysis releases GDP growth figures, which are reported on a real, inflation-adjusted basis. This is a grave disservice to investors and consumers! Inflation has a very real, and definite, cost.

The media is trumpeting from the rooftops today's new all-time nominal high for the Dow, but look at what happens when inflation meddles with returns:

 

Dow Jones Industrial Index (Nominal)

Dow Jones Industrial Index (Inflation-Adjusted)*

Oct. 9, 2007

14,164.53

14,164.53

March 5, 2013

14,253.77

13,042.51

% Gain (Loss)

0.6%

(7.9%)

*Re-based to October 2007. Source: Author's calculations, based on data from Yahoo! Finance and the Bureau of Labor Statistics.

In real terms, we're still 8% below the October 2007 high. For the Dow to achieve a new inflation-adjusted high today would have required a closing price of roughly 15,480. Inflation is a reality in the world we live in; you need to invest as such. Make sure you're looking at the right numbers.

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Read/Post Comments (9) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 05, 2013, at 10:51 PM, awallejr wrote:

    Did you factor in reinvested dividends?

  • Report this Comment On March 06, 2013, at 8:27 AM, TMFAleph1 wrote:

    No. The total return is also worth tracking, but it is separate question from that of the index level.

  • Report this Comment On March 06, 2013, at 8:44 AM, awallejr wrote:

    Except you compared a static number, the October 9, 2007 number with one five years older only factoring in the negative (inflation) yet ignoring the positive (dividend reinvestment). The total return should be the only number worth talking about.

  • Report this Comment On March 06, 2013, at 10:31 AM, TMFAleph1 wrote:

    Both are worth talking about. Consider investors who live on their stock dividends. Dividends are thus income and index level represents wealth. Considering wealth level alone is useful.

  • Report this Comment On March 06, 2013, at 11:13 AM, TMFAleph1 wrote:

    Stay tuned, as I will be putting up a separate article with some graphs to highlight the total return.

  • Report this Comment On March 06, 2013, at 5:30 PM, awallejr wrote:

    K I would find that interesting to see.

  • Report this Comment On March 06, 2013, at 8:58 PM, DrGoldin wrote:

    I do think the author's point is still valid. The DJIA is a pretty arbitrary indicator anyway. It's not as though the world will be qualititatively different now that we've passed the nominal high. Mostly it's just a psychological benchmark: "We're back to even!"

  • Report this Comment On March 06, 2013, at 9:02 PM, TMFBiggles wrote:

    The nominal total return, with dividends, from the Dow's 2007 high to yesterday's close is 17%:

    http://www.fool.com/investing/general/2013/03/06/is-the-dows...

    Just a few numbers I pulled together for both sides of the argument.

    - Alex (the other one)

  • Report this Comment On March 06, 2013, at 9:43 PM, awallejr wrote:

    Thanks for that calculation. It does show the value of the dividend.

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