While we just celebrated another all-time high in the Dow Jones Industrial Average – the S&P 500 got very close, but no cigar – the Japanese Nikkei 225 index has not set a single all-time high for 34 years. Put another way, it is still not back up to its December 1989 level. As of 18 December, it is almost 16% below its lofty peak going into the 1990s.
That, however, is grossly misleading. The Nikkei 225 is not adjusted for dividends, a fact that may come as a surprise for Norwegians whose benchmark indices have been dividend-adjusted for more than 40 years. As it happens, the same goes for the S&P 500 and the Dow Jones Industrial Average, the latter also being archaic in its composition. Total return indices have been calculated for a while now, but the headline indices are just price indices.
According to MSCI indices, Japan has delivered a total return of 44% since New Year’s Eve 1989. It’s not a lot, but it’s a lot better than a loss of 16%. Similarly, the S&P 500 and the Dow Jones have returned 10.2% and 10.6%, respectively, against headline returns of 7.9% and 8.0%. If you find this difference unremarkable, please note that adding dividends more than doubles the accumulated return over these three-plus decades. You know, compound interest.
What may be a bit more surprising, is that the number of all-time highs increases markedly when we adjust for dividends. The MSCI Japan total return index produced 80 all-time highs during this period, while of course the unadjusted index produced none. For Dow Jones, the tally rises to 898 from 689, while the S&P 500 sees an increase to 875 from 702.
Considering that total return indices have a higher rate of growth, it shouldn’t perhaps be that surprising. But I’ve noticed that many people misinterpret a large number of all-time highs. It’s taken to be a manifestation of stock market volatility, whereas in fact it is the exact opposite. After all, your savings account hits a new all-time high every single day.
Hence, don’t be scared of all-time highs. A lack thereof is a lot scarier.
About the author
Finn Øystein Bergh
Chief economist and -strategistFinn Øystein Bergh joined Pareto in 2010, the first years in Pareto AS before joining Pareto Asset Management in 2015. He has previous experience as a journalist, chief economist and later managing editor in the financial magazine Kapital. Finn Øystein Bergh holds an MSc in Economics and Business Administration, MBA, cand. polit. (an extended master's degree) in political science and cand.polit. in economics. He writes the financial blog Paretos optimale, and has published several books on economics.