The news has been reporting that the stock market (or some indices) are at all-time highs. That’s great but in a healthy economy, shouldn’t this happen regularly or is this just trying to indicate that COVID is now firmly in our rear view mirror?
Yes, they are extremely common. You get different numbers but easily once every 20 days or fewer for the modern era.
Yes, just as all-time highs for government debt in nominal $ terms are a normal and routine matter - yet frequently described as an unsustainable national crisis. (What matters is debt to GDP ratio.)
One thing to note is that the headlines focus on price return indices, not total return. The German DAX total return index is the only exception among major markets. US stocks traditionally pay out low dividends, around 1.5% on average. This means that (other things being equal) the price return of the US stock market will reach all time highs more frequently. International stock markets pay out around 3% in dividends, almost 4% in the case of the FTSE-100, so the dividend yield represents a much larger proportion of the total return and all time highs in price return will be statistically less frequent.
The media loves the stock market because it moves every minute. It’s the ultimate evergreen story.
It’s rare to see stock prices adjusted for inflation. Yet that is what most people should care about, assuming they are not day traders.
Kevin Drum:
The stock market is covered like a sporting event: any argument that is superficially plausible gets green lit for broadcast. Read the daily bow wow with skepticism.
Yet that graph shows that the S&P 500 has more than doubled in less than a decade - adjusted for inflation. That’s about 8% a year. That’s terrific in a period when GDP is only increasing by 2% a year.
Put your money in stocks!
Or, more carefully, put your money in a few top tech stocks. The NASDAQ 100 has zoomed up 450% since 2014, again inflation adjusted.
That’s mostly because seven stocks have reached the unimaginable trillion-dollar market cap level. (Microsoft, Apple, Saudi Arabian Oil, Alphabet, Amazon, Nvidia, and Meta, as of Feb. 1.) The rest are hit and miss.
Put your money in seven stocks!
Or is it already too late?
The more reasonable takeaway is that today’s market is returning to the record highs seen just before the pandemic. That’s truly astounding. No disaster in U.S. history has seen a turnaround that quick from such a drastic low. If anything the rebound indicates that the American economy is solid and in fact performing better than any other country’s. A remarkable fact.
And currently everything about the economy is chugging upward - manufacturing jobs, wages, employment, megayachts - so the rest of the year should see a continuing run of record highs in stocks.
Unless. Unless any one of a million new disasters appear out of nowhere. Happy stockhunting!
No, stock prices adjusted for inflation ignores dividends. If you want to make an inflation adjustment, what people should care about is total return adjusted for inflation. I can’t tell from that chart whether Kevin Drum is using total return data, but I suspect he isn’t since he incorrectly identifies the date of the prior total return peak which was 1/3/22. That’s a bit careless when he’s being condescending about people looking at the wrong thing.
His conclusion was correct as of the data of his post, on 1/22/24 the total return adjusted for inflation was still around 5% below the 1/3/22 high. But yesterday 2/23/24 was an all time high for inflation-adjusted total return.
Incidentally there does exist an S&P 500 total return index. Data here:
That still needs to be adjusted for inflation though. Also, it assumes that all dividends are reinvested.
In defense of Kevin Drum, the underlying point is that all financial series should be adjusted for inflation, be they price series like the S&P500 index, total return series like S&P 500 (TR) (^SP500TR), retail sales, inventories, whatever.
Stock market record highs are pretty common.
During Trump’s presidency, the Dow made 126 new all-time highs, which was slightly more than Obama’s 123, but still lower than Clinton’s 263. Both Obama and Clinton served two terms as president.
The market beat pre-pandemic highs before the end of 2020.
The DJIA peaked at $29,568.57 Feb 12, 2020 and dropped to its lowest on Mar 23, 2020 when it dipped to $18,213.65.
It hit $29,933.83 on Nov 9th, 2020 which was the first day of trading after the election was called for Biden the previous Saturday. There wasn’t a single moment in 2021 when the DJIA was lower that its pre-pandemic high.
During Trump’s presidency, the Dow made 126 new all-time highs, which was slightly more than Obama’s 123, but still lower than Clinton’s 263. Both Obama and Clinton served two terms as president.
Not inflation-adjusted.
Yes, that’s correct, even inflation-adjusted.
I didn’t check the Dow because it’s a ridiculous index of only 30 stocks that they keep switching out whenever one goes into the tank. Both the S&P 500 and the NASDAQ are more reliable. The Dow tracks them because that’s what it’s built to do, IMO.
The WIlshire 5000 used to be the best index of the overall economy since it looked at a far larger range of corporations. But the merger economy has gutted it. There are only about 3500 major corporations in the country today. I can’t find a good inflation-adjusted chart but it too is at a record high today.
To the extent that corporations represent the economy, the economy is doing fantastic. The question is therefore how representative of the greater economy are corporations? Remember that stock prices are indicative of future value. Tesla recently had a market cap greater than all the other major carmakers combined. This obviously was ludicrous and the inflation-adjusted stock has gone down some 50%. It fell out of the trillion-dollar club.
Since the Superlative Seven drive both the NASDAQ and the S&P 500, what does that really say about the economy?
I don’t play the stock market. I have an advisor draw up a diverse portfolio. But I do wish I had invested all my money in a few stocks a decade ago. Everybody does but nobody did. Our American obsession with the stock market hurts more people than it helps.
Even in a trend line going positive, new peaks are rare. For example, a winning gambler will only be at peak bankroll roughly 5% of the time. The rest of the time they will be below their peak bankroll, even though they are winning overall. It’s just that the ‘peak’ grows in value along with the average. So you are winning, but absolute new highs are rare.
This is due to variance. Even winning plays lose sometimes. How often you record a new peak will depend on variance and how much signal there is.
These seem to agree the only difference being whether something that happens once or more a month is rare.
The OP is not asking about inflation adjusted highs.
The last time the S&P 500 was below its pre-pandemic high was November 3, 2020. It tells pretty much the same story as the DJIA.
This is not a reasonable takeaway given the above.
The massive continuation of the outperformance of the Magnificient Six (ex-Tesla; and in fact somewhat ex-Apple) for the past year has been because of AI expectations. Right now it’s hugely resource intensive to be competitive in AI, so there’s a big barrier to entry in the sheer amount of capital required.
The thing about just passive indexing is if that if the fundamental character of the economy is perceived to be changing, you go with the trend of that perceived change - whether or not the market is behind or ahead of the curve on discounting the change. Over the last two decades that has been unequivocally a good thing, it would not have been profitable to diversify away from the big tech companies that have come to dominate the index. That’s no guarantee it will continue to be the best plan, of course, but it’s no less “real” than anything else.
Oddly, you didn’t quote my sentence:
So of course the two tell pretty much the same story. Nevertheless, people should pay more attention to S&P 500. The Dow’s mimicking often wanders off until stocks are replaced.
False highs. With the S&P 500 fewer than ten stocks are driving the entire market. Remove them and the S&P 500 is flat or even falling … hard.
This is a highly speculative market. A lot of stock churning. We are in for a hard fall come summer or fall.
While I agree with your point in general, the results of the S&P 500 are now dominated by seven companies (Microsoft, Apple, Meta, Nvidia, Alphabet, Amazon, Tesla).
Since Oct. 22, the S&P 500 would be down overall, except that those 7 stocks went up 117%. The other 493, not so much.
Seven stocks now have trillion-dollar market caps, as I noted above. Apple is still second. Nvidia just touched two trillion, making it third. Tesla has slid down to 11th.
Apple’s future growth is somewhat in doubt, according to articles I’ve read, but I’ve been expecting Apple to tank for longer than I can remember and it never has. And in 2023, “When accounting for reinvested dividends, Apple stock’s total return was an incredible 45%.”
Yes. I said that earlier, but did not put in the detail. Thanks for it.
That’s why I - and probably Riemann - think that those seven stocks are outperforming the reality.
The rest of the market is not flat, it’s rising, and the only thing that’s false is to exclude the stocks that are going up the most and call everything else the “real” market. Are you claiming that Amazon, Google, Microsoft, Nvidia are not doing something real?
I think Apple probably would have fallen, but with the massive barrier to entry in AI just having massive cash resources and being in that space has offset worries about whether iPhone sales can justify the P/E, so it has just kind of been treading water while other companies that have shown something in AI have skyrocketed. The company does have a good track record of not being at the bleeding edge but then producing some great products.
I don’t know… Is Apple Vision the first product they developed entirely without Steve Jobs’ input? It looks like a product failure. And it looks to me that they got caught napping by AI. Samsung already has a dedicated AI chip in the new Galaxy phone. Every other major player has AI chatbots spun up and are advancing rapidly. Apple hasn’t shown much yet that is up to the level of the competition.
Iphones are just too good. I still use an XR, many generations old. I looked at the upgrade to the iPhone 15, but side by side it’s almost impossible to tell them apart. I don’t have any speed issues. So why upgrade? Apparently this is a common experience, because iPhone sales are not what they once were, and skipping upgrades is now really common.