Record Highs for Dow and S&P 500? We Still Need Double-Digit Gains

APDon’t celebrate too soon

If you’re waiting for the Standard & Poor’s 500 index and Dow Jones Industrial Average to reach record levels, maybe you shouldn’t hold your breath.

As I’ve noted before, we’re heading into “record” territory — in the coming days and weeks the financial media will be full of talk about all-time highs for the Dow and S&P 500.

That’ll be true in nominal terms, and a measure of excitement is understandable, I guess — the Dow will pass its all-time closing high of 14,164.53 and the S&P will surpass the record of 1,565.15. But those levels were reached on Oct. 9, 2007, more than five years ago. If you account for price rises in the past half-decade, we’re still quite a way off the real highs.

Here’s some perspective from Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management:

The Dow Jones Industrial Average closed at a nominal high of 14,164.53 on October 9, 2007.� We�re approximately 1.8% off that high. However, if you adjust the price using the CPI, we�d have to hit 15,639.89. We�re about 11% shy of that. Adjusting the price with the GDP deflator (economy-wide inflation instead of just consumer-level inflation), then the high is 15,359.85; we�re about 9.4% short of that.

And the S&P 500?

We�re 3.66% below the nominal high, but 11% below the real high, if you adjusted the SP&500 based on the GDP deflator. If you use the CPI, we�re 12% below the high.

Something to keep in mind amid all the fanfare that’s about to descend upon us.

Update: As reader intrepidez notes in the comments, we have indeed long passed nominal highs if you include dividends. The Dow passed through that level on Jan. 18, 2012, according Jacobsen, while the S&P 500 passed its nominal total return high last August. As Jacobsen says:

I think this shows the importance of considering real returns and appreciating the silent power of dividends.� The headline indices mask both of these features which are likely going to be more and more important as Treasury yields don�t compensate you for inflation and businesses start kicking off more dividends.