US Stocks Are NOT Making New Highs

James Juliano Insights

Many were celebrating this President’s Day by cheering the headlines from last Friday about new highs in the US stock market.

Green is back! S&P 500 sets new record high, CNN

Bull is back:, Dow tops 18000, USA Today

A Record Close for the S&P500, Barron’s

These headlines are wrong!  The US stock market is NOT at a new high, at least not in real terms.

The US stock market, as measured by the S&P 500, has done extremely well and advanced over 50% since 2013. However this advance and the new highs touted by the financial press measure the market in nominal terms. One almost always sees stock prices quoted in nominal US$ terms. Viewing prices in nominal terms is only one lens to measure value, and observers can be easily fooled by inflation when doing so. A more honest way to measure the level of stock prices, or any prices for that matter, is to view them in terms of something whose value is stable over time. Rather than measuring stocks in US dollars that were losing value from 2002-2012, we prefer to look at stock prices in gold terms. Doing so reveals the real value of the US stock market.

In gold terms the S&P 500 has still advanced nicely, but it is not at new all time highs. The market has more than doubled, up 150%, from its 2009 and 2011 lows near 20 gold grams to now levels near 50 gold grams. , the pre 2008 crisis levels close to 80 gold grams are still another 60% higher from here. Viewed in gold terms there is no way to conclude that the S&P 500 is extremely overvalued. The market is merely inching its way back towards much higher real levels seen prior to 2008.

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Of course, the market does not know it is making new nominal highs or that it is undervalued in real terms. The market is merely a pricing mechanism whose future path will be determined by future policies. We agree 100% with Brian Domitrovic who yearns for a 1980s/90s style Reagan/Clinton policy mix of “substantial marginal tax cuts in the context of gold-commodity stability at low dollar prices.” His recent article is a must read, This Economy is Yearning for the Policy Mix.

The two policy turning points he highlights (Reagan’s sound money coupled with tax cuts in 1982 and the Clinton era strong dollar boom sparked by the Republicans taking Congress in 1994) resulted in enormous real gains for prosperity, wealth and the S&P 500. The S&P 500 increased 16X in real terms over the two decades from 1980-2000.

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Bottom line, there is a lot of reason for optimism. In fact, as we wrote in Spring 2014, investors must guard against under optimism. As we concluded at the time,


“The stage is being set for a transition from the failed polices of the past thirteen years to a new set of pro growth policies. The mid-term elections this fall will give us a strong signal about the reality and strength of this shift. Future policies cannot get much worse than they have been. Reductions in the “wedge” across monetary, fiscal and regulatory policy have the power to unleash a US bull market not seen since Reagan and Clinton. Many pundits have celebrated the recent equity bull market since 2009. As we pointed out, this advance barely got us back above the nominal all time highs in the S&P500, and in real terms we lag far behind. There has been no bull market, yet. If we get the right set of incentive based polices going forward then maybe 2013 will be seen as the first pitch of the first inning of a new bull market. Follow the policy, and guard against under optimism.”

Our full article, as it appeared here on, is worth revisiting.

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