The stock market flirted with historical highs this week, with the Dow Jones industrial average trading higher than 16,000 and the Standard & Poor's 500 exceeding 1,800 for a time.
But are stock prices really at record levels? Adjusted for inflation, the answer would seem to be that they are not.
On Monday, the first day the S&P 500-stock index traded above 1,800, it closed at 1,791.53. That was 17 per cent higher than the peak reached in the spring of 2000, when the country was in the midst of a love affair with technology stocks.
Adjusted for inflation, however, it is 14 per cent lower than the 2000 close. But that may be misleading, both because of the way the S&P 500 is calculated and the nature of the bull market that ended in 2000.
The S&P, like most indexes but not like the Dow Jones industrial average, is capitalization-weighted, meaning that the companies whose stocks are worth the most have the largest impact on the movement of the index.
In 2000, two market trends combined to inflate the prices of the biggest stocks. The first was the belief that technology companies could only continue to grow and prosper.
That drove up some small-company stocks, but it also did wonders for some big ones. The second was the general belief that - for the long term at least - the stock market would always be a good investment.
The seemingly conservative way to invest in stocks was to buy index funds - and that meant that most of the money went into the biggest stocks, driving their prices still higher.
For the 25 companies in the S&P that were worth the most money on March 24, 2000, it is remarkable that anyone who bought five of them that day, the day the market peaked, would have lost more than 90 per cent of the investment had that person held on for the next 13 years.
Those companies are Lucent Technologies, Nortel Networks, MCI WorldCom, Sun Microsystems and the American International Group. Cisco, then the second most valuable company in the index, has survived and done well, but its stock is off by more than two-thirds.
So was Dell before it recently went private. Those 25 stocks, by the way, accounted for 45 per cent of the value of all 500 stocks in the index. So anyone who bought an index fund put nearly half of the investment into those companies.
Calculating how stocks did is sometimes difficult. AT&T Corp., which was then the 12th-most-valuable company, is not the same company as the current AT&T Inc., which is descended from SBC Communications, then No. 18.
The old AT&T shareholders have a small stake in the new AT&T, but most of the value the old shareholders would have now is in stock in Comcast, which they got when that company bought AT&T's cable operations.
The top in March 2000 was an artificial one in some ways. By the end of the year, the S&P 500 was down 14 per cent from the peak, but six of the 10 industry sectors had risen during the period.
Their gains, however, were completely overshadowed by the information technology sector, which had lost half its value, and the telecommunications sector, which had lost 38 per cent. Then, in 2001, the recession damaged most stocks.
Adjusted for inflation, six of the sectors are higher now than they were in 2000, while one, utilities, is about where it was then. But information technology and telecommunications have never fully recovered, and the financial sector is also lower because of the financial crisis that came eight years later.
Still, even with all those caveats, the S&P 500 does represent the results for many investors in the past 13 years.That poor performance helped cause pension funds to become underfunded and forced some people to delay retirement. The Internet bubble had aftereffects that hurt many people who had avoided the dot-com stocks that were briefly deemed so valuable.
indiatimes.com
But are stock prices really at record levels? Adjusted for inflation, the answer would seem to be that they are not.
On Monday, the first day the S&P 500-stock index traded above 1,800, it closed at 1,791.53. That was 17 per cent higher than the peak reached in the spring of 2000, when the country was in the midst of a love affair with technology stocks.
Adjusted for inflation, however, it is 14 per cent lower than the 2000 close. But that may be misleading, both because of the way the S&P 500 is calculated and the nature of the bull market that ended in 2000.
The S&P, like most indexes but not like the Dow Jones industrial average, is capitalization-weighted, meaning that the companies whose stocks are worth the most have the largest impact on the movement of the index.
In 2000, two market trends combined to inflate the prices of the biggest stocks. The first was the belief that technology companies could only continue to grow and prosper.
That drove up some small-company stocks, but it also did wonders for some big ones. The second was the general belief that - for the long term at least - the stock market would always be a good investment.
The seemingly conservative way to invest in stocks was to buy index funds - and that meant that most of the money went into the biggest stocks, driving their prices still higher.
For the 25 companies in the S&P that were worth the most money on March 24, 2000, it is remarkable that anyone who bought five of them that day, the day the market peaked, would have lost more than 90 per cent of the investment had that person held on for the next 13 years.
Those companies are Lucent Technologies, Nortel Networks, MCI WorldCom, Sun Microsystems and the American International Group. Cisco, then the second most valuable company in the index, has survived and done well, but its stock is off by more than two-thirds.
So was Dell before it recently went private. Those 25 stocks, by the way, accounted for 45 per cent of the value of all 500 stocks in the index. So anyone who bought an index fund put nearly half of the investment into those companies.
Calculating how stocks did is sometimes difficult. AT&T Corp., which was then the 12th-most-valuable company, is not the same company as the current AT&T Inc., which is descended from SBC Communications, then No. 18.
The old AT&T shareholders have a small stake in the new AT&T, but most of the value the old shareholders would have now is in stock in Comcast, which they got when that company bought AT&T's cable operations.
The top in March 2000 was an artificial one in some ways. By the end of the year, the S&P 500 was down 14 per cent from the peak, but six of the 10 industry sectors had risen during the period.
Their gains, however, were completely overshadowed by the information technology sector, which had lost half its value, and the telecommunications sector, which had lost 38 per cent. Then, in 2001, the recession damaged most stocks.
Adjusted for inflation, six of the sectors are higher now than they were in 2000, while one, utilities, is about where it was then. But information technology and telecommunications have never fully recovered, and the financial sector is also lower because of the financial crisis that came eight years later.
Still, even with all those caveats, the S&P 500 does represent the results for many investors in the past 13 years.That poor performance helped cause pension funds to become underfunded and forced some people to delay retirement. The Internet bubble had aftereffects that hurt many people who had avoided the dot-com stocks that were briefly deemed so valuable.
indiatimes.com
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