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The stock market is currently hitting new highs, with the Dow Jones Industrial Average (DJIA) reaching 40,000 for the first time. However, these highs may be misleading due to inflation. When adjusted for the 21.1% cumulative inflation during the Covid period, the DJIA’s real value is only 33,000, a level that was first reached three years ago. This calls into question the true growth and improvement of the stock market.

While the DJIA is struggling to break through its previous high, the S&P 500 and Nasdaq are also reaching new highs, all above their previous levels. However, when adjusted for inflation, these new highs disappear, suggesting a mix of hope and concern for the future of the stock market. The inflation-adjusted indexes show that the market needs to rise significantly in order to reach the same levels as reported.

The outperformance of the S&P 500 and Nasdaq can be attributed to market capitalization weightings favoring larger companies and growth stocks outperforming value stocks. However, there is a warning in these differences, as history shows that returns to previous highs could potentially lead to reversals. This raises the question of whether the current stock market environment is the start of a bull market or just a return to previous trends.

In conclusion, while the media may be portraying the stock market as in a new growth phase, adjusting for inflation shows a different, less optimistic picture. It is important to be a careful realist in this environment, rather than an enthusiastic optimist. The stock market’s future remains uncertain, and investors should be cautious in their approach. Remember that when the media is overwhelmingly positive, it might be time to be a contrarian and take a more critical view.

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