Psst -- the Dow Is Still 8% Below Its 2007 High

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We finally got there! Stocks put up solid gains today, as the S&P 500 and the narrower, price-weighted added 1% and 0.9%, respectively. That was enough to put the Dow past its previous all-time closing high of 14,164.53, which it achieved on Oct. 9, 2012 -- in nominal terms, anyway.

The S&P 500 is now within 2% of its all-time high, which it achieved on the same day. Incidentally, if you're wondering about small-cap stocks, they surpassed their 2007 high back in April 2011 -- the Russell 2000 Index now sits 8.4% above its July 2007 high.

The VIX , Wall Street's fear gauge, fell nearly 4% to close below 13.5. Few investors want to protect themselves against declines when the market is making new highs -- little wonder the VIX is back at rock-bottom levels. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)


Don't forget the inflation gremlins
Financial journalists typically report growth and returns on a nominal basis (i.e., before inflation is accounted for), except where someone does the work for them, such as when the Bureau of Economic Analysis releases GDP growth figures, which are reported on a real, inflation-adjusted basis. This is a grave disservice to investors and consumers! Inflation has a very real, and definite, cost.

The media is trumpeting from the rooftops today's new all-time nominal high for the Dow, but look at what happens when inflation meddles with returns:

 

Dow Jones Industrial Index (Nominal)

Dow Jones Industrial Index (Inflation-Adjusted)*

Oct. 9, 2007

14,164.53

14,164.53

March 5, 2013

14,253.77

13,042.51

% Gain (Loss)

0.6%

(7.9%)

*Re-based to October 2007. Source: Author's calculations, based on data from Yahoo! Finance and the Bureau of Labor Statistics.

In real terms, we're still 8% below the October 2007 high. For the Dow to achieve a new inflation-adjusted high today would have required a closing price of roughly 15,480. Inflation is a reality in the world we live in; you need to invest as such. Make sure you're looking at the right numbers.

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The article Psst -- the Dow Is Still 8% Below Its 2007 High originally appeared on Fool.com.

Fool contributor Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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