Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Is the Dow Jones Industrial Average (.DJI)’s All-Time High a Good Omen — or a Warning Sign?

Dow JonesFive and a half years ago, the Dow Jones Industrial Average (INDEXDJX:.DJI) set an all-time record high of 14,165 points before sliding into the second-worst bear market in its history. Yesterday, the Dow broke its record, nearly four years to the day from the start of its rebound. Memories of that long fall still linger, staining the perception of those who endured it and tempering the optimism of all but the most fervent bull. Doomsayers are to be expected this far into a sustained rally — which, at more than 1,000 trading days with no real correction, has now run well ahead of both the median and average length of all bull markets since the Dow’s creation. But does this market really deserve the distrust, fear, and outright anger many investors have shown toward it as it continues to defy calls for another crash?

It’s important to have a little perspective. The Dow Jones Industrial Average (INDEXDJX:.DJI) set a record yesterday strictly in nominal terms, not accounting for inflation or the dividends paid out by its components. However, if you had instead bought the Dow’s total-return index (which accounts for reinvested dividends) when it reached all-time heights in 2007, you’d have been back to breakeven a little more than a year ago. This same investment produced a 17% gain from the 2007 peak to yesterday’s fresh “all-time record” in the standard Dow Jones Industrial Average (INDEXDJX:.DJI) index.

Nominal growth and real growth are not quite the same thing. Inflation is (almost) always chipping away at the value of a dollar, so a 17% gain is really more like a 7% gain in real terms. A gain is a gain, no matter which way you slice it. However, without those dividends, the Dow would still be 8% lower than its 2007 peak in real terms and about 11% lower than its real dot-com-era peak. It’s easy enough to find reasons for both optimism and pessimism when it comes to fresh records in stale indexes — after all, in an equivalent 13-year period during the last great bull market, the Dow Jones Industrial Average (INDEXDJX:.DJI) grew by nearly 600% without the aid of dividends.

This covers what happened. But it doesn’t explain why — or, more importantly, tell us what might happen next.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.