Kelly Evans: The stock market has done even better than you think
Kelly Evans
I’m running the numbers just to get a feel for things as I get ready to go back on the air on Tuesday. The market has certainly taken off this year, at least until the recent soft patch. In general, everything has done far better than I expected post-Covid. Maybe it really is the AI boom. Maybe it’s the still-ongoing fiscal stimulus. Maybe it’s the immigration surge. Who knows.
So, the S&P is up a healthy 7.5% since January 1. The Dow is up a more modest 2.6%. But here’s the catch: those numbers are actually understating the market’s true performance by a half-point or so. And this always happens. Why? Because that price performance doesn’t include dividends, which actual investors who own the indexes get to pocket–or more crucially, reinvest.
Yes, you nod. But this becomes a very big deal over time! And the technology does exist today to show the real, all-in returns. The problem is, if we ever switched over to reporting it that way, the average American’s head might explode. Because if you include reinvested dividends just since 1987, the Dow would currently be at 95,604. No joke–it’s on the provider’s own website. Nearly 100,000! And the S&P, instead of 5127 today, would be at 11,152.
Well, this is just a silly thought experiment, you say. But Germany has already been reporting this way–on a total return, not just price basis–for decades. The DAX switched over in 1987. Mark Hebner, the CEO of Index Fund Advisors, has put together a handy, interactive chart (#7 here), where you can see that Germany’s market looks pretty good–outperforming all but the U.S.–until you switch the others over to total returns. Then, it trails Australia, the Netherlands, Ireland, and even France. Why those countries don’t also make the reporting switch, I don’t know.
Point being, if you own the major U.S. indexes, you’ve actually done even better than you think over the years. This has big implications. It means, for instance, your money does better in stocks versus bonds than you might realize. (Wonky note: researchers Samuel Hartzmark and David H. Solomon think this could even explain the equity return premium; read their paper for more.)
It also means your active manager, mutual fund, or hedge fund may not be outperforming by as much as you think if they are only comparing their performance to the price indexes. It even means supposedly “winning” funds are getting flows they don’t merit, since funds typically follow performance.
But it also means that failing to reinvest your dividends is a really big deal. All of this stems from the fact that when stocks go ex-dividend, they drop in price. They didn’t “lose value,” or finish “in the red” that day because of some actual economic change. They simply lowered in price to reflect the cash amount paid out. But if you don’t include the cash amount paid out, your price index underperforms reality.
And if you not only include, but also reinvest the dividend, your total returns over time skyrocket. Hartzman and Solomon note the Dow could be well north of 672,000 by this point if you had included total returns starting in 1926. Maybe it’s crazy; or maybe it’s crazy we’ve gone this long not reporting on a total-return basis. As those authors note, you could even try to “harmonize” the total return indexes back to today’s current Dow and S&P price levels to help the public stomach the change, and then report total returns going forward.
In any case, if you like the sound of this, Hebner has a petition that you can sign here. Either way, perhaps you can sleep a little better knowing that you’ve probably done better over time in the market than you realize.
See you tomorrow!
Kelly
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