Aye lad, there's the rub. As we said in "Gail Dudack on What's Ahead for the Stock Market":
...Secular bears don't necessarily lose money in the index, it's the trending sideways while inflation eats away at you that's the killer, especially since we went off the gold standard....From MarketWatch:
Commentary: With inflation in tow, Dow 10,000 isn't what you think
The Dow Jones Industrial Average is back within spitting distance of 10,000. There's a lot of debate, of course, about what that may mean for the future. But it's pretty good historically, right?
After all, the index was below 1,000 as recently as the early 1980s. It peaked at 381 just before the great Crash of '29. Despite the turmoil of the past couple of years, it looks like shares still rise over time, yes?
Not so fast.
When we look at the Dow, our eyes are playing tricks on us. I'm not just talking about the fact that the index is changed from time to time, as some companies replace others. Over the long term, it's been a pretty decent tracker of share prices.
What I'm talking about is the hidden role of inflation. It's the great sneak thief of money. Too many investors overlook it. If the Dow doubles in dollar terms, but your dollars halve in value, you may look like you've made progress but you haven't made any.
What really matters is what you made in "real," or inflation-adjusted, terms. So as everyone talks about Dow 10,000, I decided to ask a rarely asked question:
Will the real Dow Jones Industrial Average please stand up?
To find the real Dow, I ran two experiments. And they produced some intriguing findings.
First, going back to the late 1920s, I converted past levels of the Dow into 2009 dollars. I used the official inflation data, the Consumer Price Index, tracked by the U.S. Department of Labor.
You can see the results in Figure 1.
By this measure, Dow 10,000 doesn't seem that impressive after all. The index got close 6,700 -- in today's dollars -- as long ago as 1966. Indeed it was nearly 5,000 all the way back in 1929, just before the crash. Once you take out inflation, the rise in the index over 80 glorious years of American capitalism seems pretty tame.
Intriguingly, if you look at the chart through the mid-1990s it's hard to discern much of an upward slope at all. Yes, it's there, but it's very slight. This is hardly the soaring line, from bottom left to top right, that we are used to....MORE