The Dow Jones industrial average surged to a record close today, putting Wall Street in a celebratory mood and deflecting attention, for a day at least, from the dysfunction in Washington.
Before you pop the champagne cork and start dreaming of a luxurious 401(k)-funded retirement, though, it might be wise to ponder just how little this record really means.
For one thing, the Dow is merely an arbitrary collection of 30 stocks, and isn't necessarily representative of the whole market. The broader Standard & Poor's 500 index remains 1.6 percent below its 2007 record level.
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More importantly, the stock market indexes typically aren't adjusted for inflation. If you're saving for retirement, you should care about the purchasing power of your portfolio, not its nominal value. In real terms, the Dow remains about 11 percent below the high it hit in January 2000, at the peak of the dot-com bubble. It's also 9 percent below the Oct. 9, 2007, record, the one that was eclipsed today in nominal terms.
As it happens, the Consumer Price Index data series goes back to 1913, so it's possible to look at a 100-year Dow chart in inflation-adjusted terms. The Dow stood at 85 at the beginning of 1913, and its comparable real value today is 603. That may sound a lot less impressive than 14,253, but it's also more meaningful.
The inflation-adjusted chart offers some lessons that aren't apparent in the nominal numbers. For one thing, the bull market of 1982-2000 truly looks impressive compared with the rest of the last century. Before that, however, investors suffered through half a century of ups and downs without making any headway in real terms.
David Nicklaus is business columnist at the St. Louis Post-Dispatch. Subscribe to his Facebook page or follow him on Twitter @dnickbiz.
