Investment club members are closely watching as the Dow Jones Industrial Average (DJIA) hits 40,000 for the first time, sparking excitement and concern among investors. The media has been quick to report on the stock market’s new highs, but experts warn that inflation may be distorting the true picture of growth and improvement.
When adjusted for the 21.1% cumulative inflation during the Covid period, the DJIA’s milestone of 40,000 actually becomes 33,000, a level that was first reached three years ago in April 2021. This inflation-adjusted perspective raises questions about the sustainability of the current market rally and the potential for a market correction.
While the DJIA may be struggling to break through its previous high, other major indexes like the S&P 500 and Nasdaq have also reached new highs. However, when compared to the Consumer Price Index (CPI), which reflects the rise in prices of goods and services, the inflated levels of the stock indexes become more apparent.
The performance of the S&P 500 and Nasdaq has been buoyed by the market capitalization weightings and the outperformance of growth stocks over value stocks. But as history has shown, differences in performance between these indexes could signal a potential reversal in the market.
As investors navigate this uncertain market environment, experts advise caution and a realistic approach to investing. While the media may tout the stock market’s new highs, adjusting for inflation reveals a more nuanced and potentially concerning outlook. It’s a reminder for investors to be contrarian and not get swept up in the hype of a seemingly booming market.
