New High Stock Market News Is Misleading

Inflation continues to undermine reporting on the U.S. economy and financial system. However, the effect is ignored in media reports. Instead, price increases caused by inflation are presented as real growth.

A good example is the widespread reporting of stock market "all-time highs." For example, The Wall Street Journal Article from February 28, "Nasdaq approaches record set in 2021".

"The tech-heavy Nasdaq Composite resumed its climb on Tuesday, moving within striking distance of an all-time high reached in 2021. The gauge rose 0.4%, down 0.1% from its record of 16,057." [The daily high close set on November 19, 2021.]

The problem with that view is that the high index comes from dollar prices that had a higher purchase value than today. Over the next two and a half years, core CPI inflation increased by 11%. For a proper comparison, that past high must be converted to today's dollars. That adjusted number is 17,824 (16,057 x 111%). Therefore, today's (Feb 29) close of 16,092 is still short, at 9.7%. below its previous maximum.

All stock indices need an inflation adjustment

The two charts below show the movements of the "nominal (as reported)" and "real (inflation adjusted)" index since the beginning of the Covid period. The first graph of the reported index values ​​is the basis of the media reports. The second chart adjusts the change in value of the dollar, providing a picture of actual performance (i.e. growth that excludes the effect of inflation).

Key performance figures for those charts are in this table:

So... Neither index is in all-time high territory yet. Additionally, despite media commentary about technology driving the stock market, the Nasdaq is further away from its previous all-time high.

And the point is...

Focusing solely on reported performance is misleading, particularly when inflation is playing as big a role as it is now. It gives false impressions of growth and optimism that become enthusiastic headlines like this one from yahoo financial (February 29): "S&P 500 and Nasdaq reach new records to close a great month of February - The Nasdaq reached its first record close since 2021."

By measuring the stock market (and all dollar-based measures) in inflation-adjusted terms, the reality becomes clear. At this point, the improvement from previous lows is clear, but subsequent growth has yet to return to 2021 highs.

Can the stock market reach real new highs from now on? Of course, as long as the underlying fundamentals provide real growth.

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