How Now, Grown Dow?

Republicans say the stock market is at a record high. Eh, not really.

The Dow Jones industrial average first closed above 12,000 on Oct. 19, and has remained above that lofty benchmark ever since. The breaching of 12,000 produced much joy at CNBC, whose ratings spiked last Thursday. Only 24,000 points more to Dow 36,000!

Dow 12,000 quickly became a Republican talking point. On Oct. 19, Dick Cheney boasted that “we’ve got all-time record highs on the Dow Jones Industrials again today.” Earlier this week, White House flack Tony Fratto noted that “we’re seeing record highs in some of the markets, and that tells us, and we think it tells Americans, that there is a great deal of confidence in our economic future.”

So far, Republican candidates don’t seem to be benefiting from the Dow record, which is less surprising than it seems.

For starters, the Dow’s success does not mean that stock-market investors in general are thriving, because the Dow does not well represent the whole market. The Dow has a long and distinguished history, and remains the most popular shorthand for the performance of the stock markets. But as an overall stock-market proxy and investment tool, it’s an also-ran. The 30 stocks in the Dow Jones industrial average are huge, important, and widely held. But the index only accounts for less than one-quarter of the market. And because of its weighting system, the performance of a few stocks can have a disproportionate impact. In late September, blogger/money manager Barry Ritholtz broke down the performance of the individual Dow components since January 2000. The numbers show that a) most components are still way down from their peaks; and b) the torrid performance of a handful of stocks accounted for most of the index’s gains.

And serious investors don’t even use the Dow as much of a benchmark. According to Dow Jones, between Exchange-Traded Funds, mutual funds, and other products, “more than $47 billion” is invested in assets tied directly to the index. That’s a tiny figure. The S&P 500, whose constituents represent 80 percent of the overall market, is a much more accurate gauge of general market performance. According to Standard & Poor’s, some $1.26 trillionin assets is indexed to the S&P 500. Its breadth likewise makes it a much more popular benchmark for investors of all kinds. And when you look at the  S&P 500, it’s clear that the stock-market recovery is not as broad as the Republicans would like you to think. Though it has recovered substantially from its 2002 low, the index is still off nearly 10 percent from its 2000 peak. As for the tech-heavy Nasdaq 100, which has about $186 billion indexed to it, it would have to nearly triple in order to set a record high. So, the claim that “the stock market” is at an all-time high simply doesn’t match most investors’ experiences.

What’s more, 12,000 doesn’t really even represent a record high for the Dow. In absolute numbers, the Dow is higher than ever. But thanks to inflation, a dollar today isn’t worth what a dollar was several years ago. That’s the difference between nominal returns (how much you make on an investment before adjusting for inflation) and real returns (how much you make after adjusting for inflation). In real terms, the Dow is still nowhere near the peak it hit several years ago. The handy inflation calculator supplied by the Bureau of Labor Statistics shows that $12,000 of goods and services (or stocks) in today’s dollars buys you only $10,184 of goods and services (or stocks) in 2000 dollars.

Is this wonky and hair-splitting? Maybe. But some of those who are trumpeting the high nominal value of the stock market are urging people to focus on the real, inflation-adjusted value of another asset that has been at record highs recently. Take a gander at George Will’s absurd column last week. “Economic hypochondria is also bred by news media that consider the phrase ‘good news’ an oxymoron,” he wrote, “even as the U.S. economy, which has performed better than any other major industrial economy since 2001, drives the Dow to record highs.” Next, Will pooh-poohed high oil prices, noting “the recent 20 percent decline of the cost of a barrel of oil, from a nominal record of $78.40 (which, adjusting for inflation, was well below the 1980 peak of $92 in 2006 dollars).” Got that? Will celebrates the record nominal high in stock prices but urges readers to focus on the real price of oil. By mixing and matching real and nominal, Will could just as easily have argued that oil is more expensive than it has ever been, while the Dow is barely at the level it reached in 1999. If Democrats controlled the levers of power, he’d be making precisely that argument.

The distinction between the performance of the Dow and that of the other market indices is a perfect metaphor for the economy under Bush. Assume the stock market represents America. The Dow components—the tiny minority of the  richest—are putting up record numbers, while the masses  are struggling to do as well as they did in the late 1990s.