Stock Market at Five Year Highs!!!

The cable financial shows were all abuzz this morning about how high the DJIA and S&P closed yesterday. The DJIA closed at 13895.98, supposedly buoyed by numbers from IBM. This is the highest since Halloween of 2007.  The S&P closed at 1466.67, also a five year high - this one since Dec. 7, 2007.

Whup-tee-doo.

If you watch that you need to know there's one word that nobody uses in these discussions: inflation.  Adjusted for inflation, this is not equal to the levels of five years ago.  Adjusted for inflation, the DJIA hit its highest value in 2000 and has been losing money ever since.  While this chart is a little out of date, the change from the last point isn't big enough to move today's index up to that 2007 peak when adjusted for inflation.

Fred's Intelligent Bear Site posts this inflation adjusted DJIA chart.  Fred is pretty conservative in his estimates.  He uses the Consumer Price Index numbers with a little modification, not the Shadowstats inflation number, which is running near 10% per year.  Note that the index has stayed in a well-defined channel for the duration of this chart in 1910, only touching the extremes of the channel four times in a century.  As Fred says,

On the chart, the long term trend line in green shows an average return of 1.9% per year. If you factor in the long term 15% capital gains tax, the return is even worse. Since capital gains tax is not adjusted for inflation, the average tax must be based on the 5.4% trend of the non inflation adjusted chart, so 15% of 5.4% is 0.8% tax. Therefore, your 1.9% return is reduced to 1.1% after taxes. The Wall Street shills do not want you to know that this meager amount of capital gains is all you should logically expect from a long term general stock market investment.

You will note that the recent tax law changes put the 15% capital gains tax rate up 20% for those the Politburo decided to punish for being successful.  That makes this 1.1% conclusion worse for these people - and harder to describe in a single line.  Is it worth putting your money into the market for 1.1%?  Your call.

Another thing to get from that chart is that there are periods when the DJIA is a better investment and times when it's a poorer investment.  This is one of those times.  Those bear markets can last a lot of years, and sometimes strong corrections occur in brief periods. I'd like to tell you when to get into the market, but nobody can tell you that.  Simply being below the center of the channel doesn't mean it's due to go up.  For various reasons I've talked about here, along with many other people, I think we're in a bull market for a while.  Ten more years would not surprise me.

Governments routinely inflate their currency to get make debt go away.  It makes life harder for the citizens, but preserves the ruling class.  This is apparently one of those times, too.