Surprise! The Dow Hasn't Soared As Much As You Think
The Dow Jones Industrials have put in an impressive bull-market run over the past five years, with such huge gains that many investors have gotten nervous about how much further the Dow's upward move could really go. But as with so many things, your conclusions depend on your perspective. Even though from one standpoint, the Dow's jump has been monumental, another equally valid way of looking at the Dow's performance leads to a much different conclusion.
3 pictures of the same market
Time and time again, you've heard about the extent of the Dow Jones Industrials' gains over the past several years. From lows below 6,600, the Dow is now challenging the 17,000 mark, which puts the Dow's gain at around 155%. That's an annualized gain of just shy of 20% over the 63 months since the Dow's March 2009 low, or roughly double the long-term returns of the stock market.
From this chart, scared investors look down from today's big heights and conclude that a major bear market must be coming. Indeed, many investors have been nervous for years, even before the market reached its current levels.
But if you're convinced that the Dow Jones Industrials are near a market top, then the right way to assess their performance isn't from a market bottom. Instead, you should use a previous market top. Fortunately, we have such a top handy, from back in October 2007. And when you look at the market's returns since then, you get a much different picture:
Here, total returns of just 18% equate to annualized gains of just 2.5% or so. That return omits the dividends that the stocks in the Dow Jones Industrials pay out, but it still pales in comparison to the long-term returns of the stock market generally.
If you go back to the previous highs before 2007, you get an even longer-term view that again comes out to about a 2.5% annualized return over a 14-year period:
None of this proves that the Dow isn't poised for a decline, or that the drop won't come as soon as Monday's opening bell. But in order to get a broader historical perspective of the Dow's returns, you can't just look at a single bull market out of context. Instead, the smarter move is to look at the bigger picture, and in this case, doing so makes the case for further stock market gains look more compelling.
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