💎 Bargain Hunter: Undervalued stocks with massive upside potentialGet the list

An Inflated View Of The Dow Jones Industrial Average

Published 03/07/2013, 05:56 AM
So the DJIA has hit a new nominal high? Big deal. It has not yet eclipsed its inflation adjusted high, as is noted by this article at Bloomberg, where they said:

None of this is to say don’t invest in stocks. Nor is it to say a bubble has formed, like the technology boom of the late 1990s and the housing-fueled run-up of the mid-2000s. The evidence may even point in the opposite direction on this score: The price-to-earnings ratio — what it costs to buy a dollar of a company’s profit — for stocks in the Standard & Poor’s 500 Index is 16 percent below the level at the end of 2009.

The same goes for the Dow, which has more than doubled in four years, yet its valuation is 15 percent below the 20-year average. When adjusted for inflation, moreover, the Dow is still 9 percent below the previous all-time high hit on Oct. 9, 2007. In other words, stocks are still a bargain, historically speaking. [Emphasis mine]

Sorry, but that’s not true, the Dow is still 12 percent below the inflation-adjusted all-time high hit on Jan. 14, 2000. Have a look at this graph:

DJIA
People forget how badly the DJIA, much less the S&P or NASDAQ overshot in 2000 from tech speculation and loose monetary policy from the Fed to cover for Y2K.
3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads.

Here’s another graph to express the same idea:
DJIA 2
Yes, there may have been a ~2% dividend over the last fifteen years, so the DJIA with dividends beat inflation by a little. Bonds did a lot better.

All I want to say is that there is little reason for excitement over new nominal highs in the DJIA. Also, it is a weird average, and gives IBM too much weight. There is a better way to create a megacap index as I pointed out in the prior link.

So take a chill pill, and realize that the DJIA is a weird index, still behind inflation-adjusted highs, at a time when profit margins are at all time highs. This is not sustainable, and long-term valuation measures like the Q-ratio and CAPE10 indicate a market 20% or so overvalued.

So to all I say take defensive measures. Of course things can go higher, but markets were a lot lower in 2002 than in 1999.

Which stock should you buy in your very next trade?

AI computing powers are changing the stock market. Investing.com's ProPicks AI includes 6 winning stock portfolios chosen by our advanced AI. In 2024 alone, ProPicks AI identified 2 stocks that surged over 150%, 4 additional stocks that leaped over 30%, and 3 more that climbed over 25%. Which stock will be the next to soar?

Unlock ProPicks AI
Read Next

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2025 - Fusion Media Limited. All Rights Reserved.