New High Stock Market News Is Misleading

February 29, 2024

2 minutes read

New highs? Not yet

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Inflation continues to undermine the U.S. economy and financial system reports. However, the effect is ignored in media reports. Instead, inflation-caused price increases are presented as real growth.

A good example is the widespread “all-time-high” stock market reporting. For example, The Wall Street Journal’s February 28 article, “Nasdaq Approaches Record Set in 2021.”

“The technology-heavy Nasdaq Composite resumed its climb Tuesday, closing within striking distance of a record high hit in 2021. The gauge rose 0.4%, off 0.1% from its record of 16,057.” [The daily high close set on November 19, 2021.]

The problem with that view is that the high index number comes from prices in dollars that had a higher purchasing value than today’s. In the 2-1/4 years following, CPI Core inflation rose 11%. For proper comparison, that past high needs conversion to today’s dollars. That adjusted number is 17,824 (16,057 x 111%). Therefore, today’s (Feb. 29) close of 16,092 is still short at 9.7% below its previous high.

All stock market indexes need inflation adjustment

The two graphs below show the “nominal (as reported)” and “real (inflation-adjusted)” index moves since the beginning of the Covid period. The first graph of reported index values is the basis for media reports. The second graph adjusts for the dollar’s value shift, providing a picture of real performance (that is, growth that excludes the effect of inflation).

Nominal (as reported) stock indexes vs Core CPI

John Tobey

Real (inflation-adjusted) stock indexes

John Tobey

The key performance numbers from those graphs are in this table:

So… None of the indexes is in real all-time-high territory yet. Moreover, despite the media commentary on technology driving the stock market up, the Nasdaq is furthest from its previous all-time high.

And the point is…

Focusing only on reported performance is misleading, particularly when inflation is playing a big role like now. It gives false impressions of growth and optimism that become glowing headlines like this one from Yahoo Financial (February 29): “S&P 500, Nasdaq hit fresh records to cap big February – The Nasdaq rallied to its first record close since 2021.”

By measuring the stock market (and all dollar-based measures) in inflation-adjusted terms, reality becomes clear. At this point, improvement from the previous lows is clear, but the subsequent growth has yet to return to the 2021 peaks.

Can the stock market rise to real, new highs from here? Of course, so long as the underlying fundamentals provide real growth.

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During my 30-year career, I managed and consulted to multi-billion dollar funds. Using the “multi-manager” approach, I worked with leading investment managers. I now manage personal accounts and write about my analysis and decisions.

From my 50+ year personal/professional investment experience, I developed the skills I use to find opportunities and avoid risks. Because markets are ever changing, I choose the strategies (safety, income, value and growth) that conditions warrant.

My one regular activity is to seek developments and trends being ignored or misinterpreted by investors. These are the situations that consistently produce higher return opportunities (or higher risk levels).

I am a CFA charter holder with an MBA from Stanford Graduate School of Business and a BS in Finance from San Diego State University. I am a former Washington DC CFA board member and served on the AAUW Investment Advisers Committee for eight year. I am in my ninth year with the City of Vista Investment Advisory Committee.

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