A brief note apropos of the Dow’s new record: yes, everyone’s right that the Dow is in many ways a sub-optimal index (it was designed to be easy to calculate before the advent of computers, so cut it some slack) and that the new high has limited significance for the broader economy’s health. But it’s not completely irrelevant as an indicator, and it’s worth noting that the new record actually understates how good the Obama years have been for equity investors. For comparison, let’s look at the Bush years.
The Clinton-era peak of the S&P500 (to use a broader, more representative index) was in August of 2000. If you were fully invested then, how long would it take for you to be “made whole” – for your investment to return to its original value? The right way to calculate that is to assume the dividends from your investment are reinvested in the index (on, say, a monthly basis). If you do that calculation, you got back to your original investment value in October of 2006, more than six years later. (The nominal value of the index wouldn’t return to peak for another year.)
By contrast, the Bush-era peak of the S&P500 was in October of 2007. How long did it take to get back to that level? On a total-return basis, with monthly reinvestment of dividends, you would be back in the black by March of 2012 – four and a half years later. That’s still a long time, but substantially shorter than the recovery period after the bursting of the internet bubble. And I think most people would agree that the damage to the real economy from the financial crisis was far more substantial than was the damage from the bursting of the internet bubble and 9-11 put together.
In fact, this still understates the favorability of the comparison. From 2001 through 2006, inflation averaged around 2.7%. From 2008 through 2012, it averaged more like 2.0%. Inflation would have taken a bigger bite out of the recovery in asset values during the early 2000s than it would have during the Obama years.
Again, there’s a lot more to the story than this. In the Bush years, the housing market was where the action was, rather than the stock market. And the stock market is not a perfect measure of the economy’s health by a long shot. (Neither is the housing market.) And, most important, there’s a good case to be made that inflation has been too low during the Obama years. But the fact remains that, after a much worse financial meltdown, the financial markets have recovered more swiftly and comprehensively this time around than they did after the last bear market.