The Dow - Not Really All Time Highs
The media is going into near hysteria over the Dow rising above its 2007 closing high. While it is true that prices in the Dow, a price-weighted index of only 30 stocks, have risen above it previous peak it is important to keep some perspective by remembering a couple of points:
1) If investors were strictly invested in the Dow Jones Industrial Average over the last 5 years - they are finally back to even. Getting back to even is not considered a winning investment strategy.
2) If the Dow was comprised of the same stocks as in 2000, or even 2007, the Dow would not be at a new high.
3) The recovery is in nominal dollars not inflation adjusted dollars.
The first chart below shows the Dow in both nominal and inflation adjusted dollars using CPI as the deflator.
If we focus on the inflation adjusted returns of the Dow we find, as shown in the chart below, two things.
1) On an inflation adjusted basis the Dow is still more than 9% below its peak monthly closing high.
2) That monthly closing high was not in 2007 but in 2000.
However, by many measures, the market and the economy are vastly different than they were in 2007. Via Zerohedge:
Dow Jones Industrial Average: Then 14164.5; Now 14164.5
Annual GDP Growth: Then +2.5%; Now +1.6%
Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
Labor Force Participation Rate: Then 65.8%; Now 63.6%
Americans On Food Stamps: Then 26.9 million; Now 47.69 million
Size of Fed's Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
US Debt as a Percentage of GDP: Then ~38%; Now 74.2%
US Deficit (LTM): Then $97 billion; Now $975.6 billion
Total US Debt Outstanding: Then $9.008 trillion; Now $16.43 trillion
US Household Debt: Then $13.5 trillion; Now 12.87 trillion
Consumer Confidence: Then 99.5; Now 69.6
S&P Rating: Then AAA; Now AA+
VIX: Then 17.5%; Now 14%
10 Year Treasury Yield: Then 4.64%; Now 1.89%
EURUSD: Then 1.4145; Now 1.3050
Gold: Then $748; Now $1583
NYSE Average LTM Volume (per day): Then 1.3 billion shares; Now 545 million shares
It is also worth remembering that in 2007, the last time we were at these nominal levels, so was margin debt. We discussed this in yesterday's post on whether, or not, the Fed is building the next asset bubble the run up in margin debt and the excessive chase for yield has begun to reach historic extremes.
So, while the market analysts and economists bring out their party hats, we should pause and reflect on the reality of where we are. The recent run up in stocks, while certainly enjoyable, is not built upon strongly accelerating economic growth, surging sales or increases in full-time employment that are outpacing population growth. Rather a rally based on continual injections of liquidity and suppression of interest rates, have been the primary driver.
Furthermore, it is also important to remember that even though the market is pushing nominal new highs it only impacts a relatively small portion of the economy that are actually invested in the markets. For the rest of the population the rise in the markets will go unnoticed as the differential between their incomes and their living standard continues to be squeezed.
For now we can all enjoy the Dow at nominal new highs. Let's just be careful extrapolating a market driven to excesses by liquidity into the next secular bull market driven by improving fundamentals. These are two vastly different things.