“My Two Cents”
By Andy Sutton

9/29/2006

I am sure that no matter how isolated your corner of the United States happens to be that by now you've heard that the 'stock market' is almost at a record high. I am sure of this because its hard to find anyone talking about anything else. The 'stock market' has managed to usurp the media frenzy that usually surrounds the coming of the baseball playoffs, the beginning of the NFL season and even NASCAR's 'Chase for the Championship'.

The term 'stock market' is a rather vague term. The reference to a 'record high' is even more vague, and more misunderstood. As usual, we stand ready to debunk some popular misconceptions in American financial folklore.

When you hear the term 'stock market' at a cocktail party, the general perception is that this term encompasses the entire market. This could not be further from the truth. The 'stock market' as most people know it is the Dow Jones Industrials Average, an index comprised of 30 stocks. That's it. They're some heavy hitters from major industries, but by no means make up the broad market. There are hundreds of indexes used to measure all sorts of things, but the Dow 30 is the one most folks focus on. For an exact list of Dow 30 components, put the following link in your web browser:

http://finance.yahoo.com/q/cp?s=%5EDJI

So the Dow 30 covers most sectors and industries, and the mainstream financial press will laud upswings in the Dow as good times. Downswings in the Dow are lauded as 'buying opportunies'. While to a certain extent this may be true, the facts are that a) US stocks are generally overpriced and pay little in the way of dividends compared to foreign equities and b) the 'stock market' has done little to nothing when you look at the gains in REAL terms (read: adjusted for inflation).

Take a look at the two charts below. The first is the Dow 30 since 1971. The second is the CPI (headline and core) since 1971. While these charts are not drawn to scale, I think that even a fifth grader could see the point I'm going to make.

Dow Since 1971

CPI since 1971

In an attempt to keep this simple and non-technical in nature, just observe the overall general trend
on both charts. Granted, the CPI has done nothing but go up while the Dow has skittered and skattered
a bit. The point I am trying to make is a simple one: The Dow, when measured in real terms, as opposed
to nominal terms has done almost zip since 1971. I would contend that since the CPI notoriously
understates inflation that the effect is even more pronounced, but even using the government's own data, my
point is illustrated quite clearly.

Perhaps the most ridiculous piece of commentary I've heard with regards to the Dow approaching its all time
high was uttered by Mark Hulbert on marketwatch.com He actually asserted that if someone had invested the
last time the Dow was this high (March 2000) that they finally broke even. That is nonsense. In nominal terms, yes,
they did break even. The portfolio now is worth the same number of paper dollars as it was then. What Hulbert and the
rest of his cronies in the mainstream financial press choose to ignore is that the same amount of funny money buys
you a whole lot LESS now than it did the last time the Dow was this 'high'. And priced in gold, which is real money,
the Dow is actually DOWN!

See Hulbert's column here :

http://www.marketwatch.com/news/story/Story.aspx?guid=%7B7A5228A0%2D237C%2D49F2%2D9549%2D8385F9578367%7D&siteid=

This is where the tragic flaw in personal finance occurs. Don't count paper dollars. Measure what they will purchase
and utilize investment vehicles which will serve to preserve that purchasing power by growing your portfolio faster
than the value of the currency decreases.

So the next time you hear the phrase 'The Dow is near an all time high', consider the all-time high that folks must be
on to announce this non-event as if it mattered.

 

Andy Sutton holds an MBA in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics.

This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.