How Now, Grown Dow? (Slate) {Why stock market rally isn't such good news}

[eppur_se_muova]

Republicans say the stock market is at a record high. Eh, not really.
By Daniel Gross
Updated Thursday, Oct. 26, 2006, at 4:53 PM ET

The Dow Jones industrial average first closed above 12,000 on Oct. 19, and has remained above that lofty benchmark ever since. The breaching of 12,000 produced much joy at CNBC, whose ratings spiked last Thursday. Only 24,000 points more to Dow 36,000!

Dow 12,000 quickly became a Republican talking point. On Oct. 19, Dick Cheney boasted that "we've got all-time record highs on the Dow Jones Industrials again today." Earlier this week, White House flack Tony Fratto noted that "we're seeing record highs in some of the markets, and that tells us, and we think it tells Americans, that there is a great deal of confidence in our economic future."
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For starters, the Dow's success does not mean that stock-market investors in general are thriving, because the Dow does not well represent the whole market. The Dow has a long and distinguished history, and remains the most popular shorthand for the performance of the stock markets. But as an overall stock-market proxy and investment tool, it's an also-ran. The 30 stocks in the Dow Jones industrial average are huge, important, and widely held. But the index only accounts for less than one-quarter of the market. And because of its weighting system, the performance of a few stocks can have a disproportionate impact. In late September, blogger/money manager Barry Ritholtz broke down the performance of the individual Dow components since January 2000. The numbers show that a) most components are still way down from their peaks; and b) the torrid performance of a handful of stocks accounted for most of the index's gains.

And serious investors don't even use the Dow as much of a benchmark. According to Dow Jones, between Exchange-Traded Funds, mutual funds, and other products, "more than $47 billion" is invested in assets tied directly to the index. That's a tiny figure. The S&P 500, whose constituents represent 80 percent of the overall market, is a much more accurate gauge of general market performance. According to Standard & Poor's, some $1.26 trillion in assets is indexed to the S&P 500. Its breadth likewise makes it a much more popular benchmark for investors of all kinds. And when you look at the S&P 500, it's clear that the stock-market recovery is not as broad as the Republicans would like you to think. Though it has recovered substantially from its 2002 low, the index is still off nearly 10 percent from its 2000 peak. As for the tech-heavy Nasdaq 100, which has about $186 billion indexed to it, it would have to nearly triple in order to set a record high. So, the claim that "the stock market" is at an all-time high simply doesn't match most investors' experiences.

What's more, 12,000 doesn't really even represent a record high for the Dow. In absolute numbers, the Dow is higher than ever. But thanks to inflation, a dollar today isn't worth what a dollar was several years ago. That's the difference between nominal returns (how much you make on an investment before adjusting for inflation) and real returns (how much you make after adjusting for inflation). In real terms, the Dow is still nowhere near the peak it hit several years ago. The handy inflation calculator supplied by the Bureau of Labor Statistics shows that $12,000 of goods and services (or stocks) in today's dollars buys you only $10,184 of goods and services (or stocks) in 2000 dollars.

more: http://www.slate.com/id/2152253

[Thickasabrick]

1. Great article. n/t

[Frustratedlady]

2. The economy is so good, eh?

..."$12,000 of goods and services (or stocks) in today's dollars buys you only $10,184 of goods and services (or stocks) in 2000 dollars."

The above statement should be broadcast loud and clear. I wonder what will happen to our "economy" after the election. Will the true numbers come out for the actual cost of this administration's management?

[rock]

3. K & R