Friday, March 06, 2009

Media not reporting full truth about financial markets

I watched the financial news this week. Every news media outlet reported more or less the same story. The Dow Jones Industrial Average was below 6500 this morning and the subject lines are "Dow Jones industrial average drops below 7,000 for first time since 1997". This is bad but it stops short of telling the whole story.

This comparison uses a linear graph across a temporal variance. The problem is that this excludes inflation. If you inflation adjust the Dow Jones IA, you have to go back quite a few more years. For example, if the Dow was 6,304.87 on December 13, 1996 (as reported by Google Finance), and the inflation rate since 1996 averages around 2.8%, then the inflation adjusted bottom we would have to cross today would be 9,027. Whoops!! What are we at today? 6450 right now?

So what does this mean? Well, I started to do some rough calculations. Without going into all the details, I could not quite find where the inflation adjusted equivalent of today's index was specifically as I did not feel like researching the annual inflation rates to make the calculations, but I did surmise it should be around 1993-5.

The Dow in general though is only accounting for the top 30 stocks on the NYSE. To get a fuller picture, I prefer to use the S&P index. This tells a more thorough story as it is a value weighted index published since 1957 of the prices of 500 large cap common stocks actively traded in the United States.

Take a look at the graph and tell me where you find a year where the S&P index is inflation adjusted to where we are today. The graph is here.

Be vigilant - question everything including this blog post.

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