You may have read this a few weeks ago the same place I did, although for the life of me I can’t remember where. (I think it was Barron’s.) But it bears repeating.

And it’s this simple. If you lay the graph of the Dow Jones Industrials on top of the graph of the Standard & Poor’s 500, you find that for decades, according to the table in Barron’s (Barron’s?) the two lines are all but identical. It’s as if you compared two temperature graphs, one in Celsius, the other in Fahrenheit. Well, not that identical, but close. You just have to multiply the S&P number by 11 to get the Dow. (With Celsius, you multiply by nine-fifths and add 32. How can I remember that from 40 years ago and not where I saw this article three weeks ago?)

And then a couple of years ago, a remarkable thing happened: Both lines, the one for the Dow and the one for the S&P were rising, as they had been, with occasional dips, drops and bumps, for decades. But now the line representing the S&P 500 veered upward and left the line for the Dow in the dust.

This is significant, because the S&P 500 is a much better guage of "the market" than the Dow. Neither one reflects the entire market, to be sure. But the S&P includes 500 of our largest companies, not just 30. And it is "market-cap-weighted," whereas the Dow is still figured the same irrational way it was 100 years ago, before the advent of calculators and computers that would have allowed a sensible calculation.

So if the S&P 500 has veered upward, that suggests that the Dow, were it really the proxy for the market that Nightly News viewers assume it to be, would be a lot higher. At the 11-times conversion that prevailed for so long, it would be nearly 14,000.

This doesn’t mean I know where the market is headed. Just that for the majority of us who remember Dow benchmarks and not S&P (or other even broader) benchmarks — Dow 777 in August of 1982, Dow 2,700 or so in 1987 before a slowish decline to 2200 and then that one-day 508-point drop to 1700 or so — it’s worth noting that, by one measure, anyway, "the market" is not at 9,300, it’s at more like 14,000. Which from a low of 1,700 12 years ago is a healthy octuple, nearly a 19% annual rate of return — plus dividends — or about double, if not a little more, than the "normal" return.

Then again, much of the new world economy is being driven by astonishing technological breakthroughs, and Moore’s Law holds that computing power will double every 18 months — or did until it started doubling even faster — and that suggests the possibility, at least, that productivity can grow faster than it used to.

(Does it also mean profits will grow faster than they used to? After all, it is for a share of profits, not output, that investors invest. For example, as the Internet streamlines the distribution process and decimates middlemen, it will also allow much sharper price competition. This is great for consumers. But will it be great for investors?)

So on the one hand but on the other hand but then again and then again. All I know is that I don’t know. But I’d say the bargains are few and far between.

Tomorrow: Why These Stupid One-Cent Stamps?


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