WASHINGTON - October 5 - The Dow Jones Industrial Average, adjusted for inflation, is down 17 percent from its all-time high on Jan. 14, 2000. It would need to rise another 2,378 points to set a new record, adjusted for inflation. It is only when no adjustment is made for inflation that the Dow can be said to have closed at a record high on Oct. 3, as has been widely reported in the media.
Measuring how the Dow has done relative to inflation is the only meaningful way to assess its performance over time and what it means for investors and the economy more broadly. To fail to adjust for inflation and to say that the Dow has passed its previous peak, is like saying that a worker whose wages are a couple of cents an hour above where they were six or seven years ago is better off today, even though the purchasing power of his or her wages has fallen significantly. This is why, when the Census Bureau reports on median household income each year, it reports on median income adjusted for inflation.
The broader stock market is even further below its 2000 peak. The Dow Jones Wilshire 5000, which tracks more than 5,000 stocks and is the most comprehensive measure of the U.S. Stock Market, is 23 percent below its record close on March 24, 2000, after adjusting for inflation. (Even without adjusting for inflation the Wilshire 5000 is 9 percent below its March 24, 2000 peak.)
Some of the value of the Dow when it hit its peak in 2000 undoubtedly was the result of an unsustainable bubble. And it is good news that the Dow Jones Industrial Average, adjusted for inflation, has risen at a 6 percent annual rate over the last four years. (Note: a careful study by economists at the Federal Reserve found no evidence this was caused by the dividend or capital gains tax cuts enacted in 2003.) But simple statements that the Dow is at an all-time high are more likely to create a misleading impression than to enlighten people about the current state of the stock market.
The full analysis is posted to: http://www.cbpp.org/10-5-06bud.htm.