Dow vs Money Market (Since Peak)
On Wednesday, we looked at the breakdown of Dow components, surprised to discover that only 10 of the 30 Dow components were above their 2006 2000 highs. Four stocks -- Boeing, United Tech, Caterpillar and Altria -- were the primary drivers, pulling the Dow higher despite the drag of so many other relatively weak components. 15 of the 20 Dow stocks still below their prior highs are down substantially, with GM and Intel off ~60%, and Microsoft still down by 51%, and Home Depot and Merck off ~ 40%.
But before we get too excited about the new highs on a closing basis -- perhaps even today? -- perhaps we should look at the actual real performance of the Dow.
Consider what happened if you actually held these 30 stocks (individual issues or through the Diamonds) since January 2000: After 6 1/2 years, you are now almost breakeven on a nominal basis. If you reinvested the dividends from the Dow, you would be up 12.7%.
On a real basis, adjusted for inflation, you are actually down 19%; With reinvested dividends, you are down around 9%.
If you were lucky enough to sell back in January 2000, and you instead simply placed the money in a cash fund (money market), you would be up ~20.87% on a nominal basis; On a real basis, you are up just under 2%.
So while everyone on TV is celebrating the new highs, I can't help but think: "Yeah! We only underperformed cash by 818 basis points! Yeah!
Dow Industrials and Fidelity Money Market Fund
That's on a real or a nominal basis.
Friday, September 29, 2006 | 05:30 AM | Permalink
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Comments
In first sentence, do you mean below 2000 highs?
I think any time any index makes a new high, a statement like 66% of components are below their all-time highs will not be far from the truth.
~~~
BR: Doh!
Posted by: curmudgeonly troll | Sep 29, 2006 7:24:21 AM
Above -- 10 of the 30 Dow components are above.
And in a healthy market, we would be seeing more all time highs, greater participation cross the board.
Narrow is not a good thing . . .
Posted by: Barry Ritholtz | Sep 29, 2006 7:43:33 AM
i guess it is easy to manipulate 30 stocks opposed to the S&P , NAZ or Rus2k with 1000's of stocks. Right before elections too. Good Job Ben.
Posted by: christopherrobin | Sep 29, 2006 7:57:41 AM
Yeah, there should be still room on the upside! In almost 7 years, fundamentals have also changed a bit, and there is of course your very correct real terms observation. The flood of money/liquidity is still not absorbed (in my opinion) from the established equity markets.
Cooling off or not - there still should be more of a bull market infornt...
Posted by: saviano | Sep 29, 2006 8:00:19 AM
Yes, in the intervening 6 years The Bear has chewed up PE ratios crushing them to current levels despite record earnings AS BEAR MARKETS DO. Now, the equity markets have decided to expand those ratios in the face of declining profit margins, as if reversion to the mean were an antiquated concept in The Days of Excess Liquidity.
Posted by: Mark | Sep 29, 2006 8:25:57 AM
Barry, Curmudgeonly troll is asking about the year in your first sentence......
You wrote 2006 highs, but I think you meant 2000 highs.
Posted by: Craig | Sep 29, 2006 8:46:02 AM
What are with the numbers this morning ?? And the futures rally. Put some more lipstick on this pig. This is truly a F'ed up situation.
Posted by: CDR | Sep 29, 2006 9:11:51 AM
I'm sorry, but I must have missed the countervailing
data point that has caused the $ to rally EVERY DAY since last Thurs Philly Fed induced sell off. COuld some please fill me in? Was it the downward rev to GDP? The first drop in home prices in 11 years?
Sorry, I must not have been paying attention.
Posted by: tjofpa | Sep 29, 2006 9:26:41 AM
When trying to determine if something is going higher or lower (all that matters for making money going forward) Why does the fact that something has underperformed for 6 years on its way to new highs have any bearing? It might even argue that the spring is coiled for a higher move. I don't understand the point of showing that a market that is at the same point it was 6 years ago underperformed cash. That seems to fall in the major DUH category doesn't it?
Posted by: Q-Ball | Sep 29, 2006 9:49:09 AM
Equity market comparisons are often taken off some previous all time high.
When you change your Bloomberg settings to 1, 3, 5, 7, 10, 20, 30, 40 and 50 years - how do the total return comparisons fare?
Posted by: permabull | Sep 29, 2006 9:56:03 AM
One key factor missing here. A secular bull market in commodities started when the tech bubble finished. So if the same money had been invested in copper or crude oil what would the returns have been?
And even more important, what would the comparison of copper vs copper stocks, or oil vs oil stocks have been?
The would be the subject I would like to see in a post.
Posted by: MeanGene | Sep 29, 2006 10:04:58 AM
The reason I personally like comparing to cash is because then I don't have to deflate for inflation. I can be very confident about the interest rate received for cash. I don't have the same confidence in the measure of inflation. Oh, and there is little thing about a risk premium you are supposed to receive with stocks.
Posted by: M.Z. Forrest | Sep 29, 2006 10:31:37 AM
We have a new secular bull market for stocks under way because the market took out the highs for the last cycle. Me too i thought we were in a secular bear market but we have to listen to the market. You bears have such a dogmatic view of the markets but you are wrong and it's time for you to reajust to reality.
Posted by: Nick | Sep 29, 2006 10:35:09 AM
The numbers for the DOW are really allot worse.
Analyst calculate the expected return on stocks by using the CAPM (capital asset pricing model). My guess is that, for the Dow to compensate for, business and financial risk, should give a return of minimum 10-13% a year before you can say it creates value. If the return is lower you are not compensated for the risk taken.
Another problem is ignoring the 30% drop in the USdollar index.
Taking these two things into account the Dow should be at maybe 20.000 to break even not 11.700.
The Dane
Posted by: The Dane | Sep 29, 2006 10:37:31 AM
Nick
Im really curious how you define 'secular bull market' - last time I looked the S&P was still over 200 points below its 'secular' peak
Posted by: Steve Bowles | Sep 29, 2006 11:07:59 AM
It never seems to make sense to compare investment returns to inflation. There is no risk-free way to get returns identical to inflation (although if you ignore price volatility while you hold them, TIPS provide long-run inflation based returns). And which measure of inflation are you going to benchmark against?
It makes far more sense to compare returns to some kind of "risk-free" cash investment. But it is useful to know which one. Is this comparison to a large, well-run money market fund (and is it a specific fund or some kind of average)? Continuously rolled over 4 week treasuries? 13 week treasuries? All of these will have somewhat different returns, even though they could all be reasonably considered the benchmark for risk-free returns.
Posted by: jkw | Sep 29, 2006 11:11:08 AM
anon-
Great comparison! Let's take a market cycle low to a cycle high and see if cash outperformed it! I am dumber for having read that post.
Posted by: Mark | Sep 29, 2006 11:37:36 AM
The current market is not a fair game but is being manipulated. It is hard to put a value on such an animal. When the market is not normally distributed but are pinned at + 2 standard deviations for 3 months, the risk premium should be over 10 percent.
The copper market has been cornered from London. One party reportedly controls 90 % of the available LME copper, perhaps los bandidos muchachos. No wonder every shady company wants to go to London to escape the reporting requirements.
I read that Goldman Sachs front ran their change in ETF weightings of natural gas causing the decline while profiting from it.
The precipitous drop in oil prices pretty well exposes the fact that the futures markets are non-regulated, manipulated consumer rip-offs in which financial interests raise prices far above production costs on any commodity being traded. Then drop them as they see fit.
The world's currencies are under continuous manipulation.
P/E ratios are at historical highs. High P/E 's have been high since the mid-90's because the Federal Reserve forgot that their job was to look after the well-being of America, not wall street.
Inflation is far above the dumbed down, averaged out crap that the various agencies are reporting.
The only degree of freedom is the consumer. And the consumer's future is very cloudy.
Stock valuation models don't work very well when the growth rate of corporate earnings is negative, the risk premium is high, and P/E's are compressing.
I think Nick should margin up, today, while the market is on sale at such cheap prices. It's obviously going higher for some very good reasons.
Posted by: blam | Sep 29, 2006 11:37:38 AM
Here are a few points:
1) Valuations are relatively cheap for the big cap stocks, most DOW stocks have dividends between 2.5% and 3% and PEs between 15-18. In the last secular bear market, which was between 1966 and 1982 the PEs dropped to 9 or 10 but interest rates on risk free treasuries were 18-20%. So even though stocks had high dividendd yield and low PEs you were still better off with treasuries. Today, we have a different environment. Rates are low. I think you are better off with a GE or KO or MO or other DOW stocks paying between 2.8% and 4.5% in dividends than in bonds paying 4% or 5%. And you also get earnings and dividends growth. Therefore, unless rates go up sharply i don't see how can the market collapse in thsi environment.
Regarding inflation, there's none. We only had inflation in commodities and housing, and both are now slowing down. I expect CPI to be negative shortly. We live on a globalized world and there fierce competition which makes sustained inflation almost impossible.
Posted by: Nick | Sep 29, 2006 12:05:26 PM
jkw makes a good point. I use a moving average of the non-seasonally adjusted all-urban CPI and an index of the 13-week T-bill cumulative return for comparison purposes but the latter is what I base risk-adjusted return calculations on (geez, ended in a preposition there, oh well -- I constructed the T-bill index many years ago, in dBase III if you can believe it, to simulate a highly risk averse investor who simply reinvests gains each quarter at the current auction rate).
As to the larger point, I shifted equity weightings to favor energy and metals in 2000 but that was still a minority rotation in my portfolio; I'm sure I'm not the only one who wished, with 20/20 hindsight, that I had shifted more and/or raised more cash but in any case valid measurement of price series trend(s) requires like-to-like comparison (peak to peak normally). Making money in equities hasn't been 'easy' since 1998 IMHO.
Posted by: RW | Sep 29, 2006 12:10:13 PM
New secular bull market? Hmmm. Wasn't the bull market of the nineties set up by 1) the crash of 87 and 2) the housing crash that followed?. So, yes, I'm looking forward to a new secular bull market... just as soon as we see those two key components play out. Oh.. and a Democrat in the White House would be the icing on the cake.
Posted by: Bob A | Sep 29, 2006 12:18:48 PM
Nick, i have to say that I do not agree with you. Inflation is living well, it is called asset inflation. Money supply combined with consumer credit has send stock- bond- and housing prices up. Inflation is living outside CPI.
If you are right about CPI going negative then expect one hell of a shock for the markets. Deflation is the last thing Bernanke wants.
Again stocks are not giving a good risk/reward return compared with bonds. Some stocks are but not the broadbased indices.
Posted by: The Dane | Sep 29, 2006 12:46:10 PM
We are 6 years into secular bear market, and there is another 9-10 years to go.
So the fact that we are only -9% negatinve in our investments is not so bad. We will see much deeper levels in coming years. Much deeper.
Posted by: bob | Sep 29, 2006 1:02:32 PM
Don't post before coffee LOL.
When the index crosses (matches) its previous high, I would expect 50% to be higher and 50% lower than at the previous index high. (disregarding changes to the index/survivorship bias)
However I would expect only a small number to be making their own new all-time highs. (Mathematically, you don't need any to be at new highs - each individual stock could have been higher at some point in the past when the other 29 stocks were on average lower)
Posted by: curmudgeonly troll | Sep 29, 2006 1:18:30 PM
Nick-
I think that is why there is rotation into these stocks. Better to hide in low PEs than the other way around. But I still don't think they are cheap. Maybe fairly valued but not cheap. I am with "bob" on that point.
I don't need to own stocks. I can be in or out. Right now I am mostly out. My cash is earning 4.9% short term and risk free. If I extended it a littlle (6 mos) it would be even better.
Posted by: Mark | Sep 29, 2006 1:58:13 PM
