Inflation And Dividend-Adjusted NASDAQ Performance: The Real Story

Includes: QQQ
by: Don't Quit Your Day Job

Another week, another chart making the rounds which was, at best, misguided.

Two weeks ago, we watched with amusement as people abused y axises world wide with the “The Market is like 1929!” chart. Last week? Way too many publications complaining about the NASDAQ’s nominal peaks, with perhaps a few scattered inflation adjustments – cute.

A Better Chart – NASDAQ, Inflation and Dividend-Adjusted

Here’s a chart of NASDAQ from March of 1999 (just before peak!) to today, dividends included (the orange line):

Dividend Adjusted NASDAQ Through March, 2014

Dividend-Adjusted NASDAQ Through March, 2014

How did we get the dividends? Good question – by proxy.

We used the payout history of the PowerShares NASDAQ ETF (NASDAQ:QQQ), to estimate the dividend yield in each month, did a little linear interpolation, added it together, and made some delicious charts. We’re estimating on the low side here – remember, dividends on QQQ only started in 2003, and this is a crude model. We don’t attempt to match dividends to companies/days – we’re just blending dividends over all the trading days in the year. (If someone can track down index dividends on the NASDAQ since, say, 1998 – please let us know, we’d love to present a more accurate chart).

However, that chart doesn’t tell you the full story… where did the inflation factor go? Hey – the first one was for illustration only. Once you add inflation back into the mix, things are a bit more grim:

Dividend and Inflation Adjusted NASDAQ Through March, 2014

Dividend and Inflation-Adjusted NASDAQ Through March, 2014

You can grab said dividend information from Yahoo!, here. Note that Yahoo also has a dividend (and split)-adjusted close which almost does what we want – but not quite.

The intraday high and closing high both occurred on the same day: March 10, 2000. Respectively, they were 5,132.52, and 5,048.62. Through today, you’d still be looking at around the equivalent of a 3,200, normalized for March of 2000, by this math (CPI-U from the BLS via the St. Louis Fed, extrapolated out a few months).

Most People Are Still Ignoring That Major Factor …

If you’ve read us for more than a few weeks, you know that one of the things we like to stress is digging into the deeper story. When it comes to stock, the whole story is earnings – now and in the future. And yes, strangely, even though there is a form of earnings which gets directly distributed to stockholders on a regular basis, for whatever reason it gets ignored by financial publications. Except DQYDJ, of course (our Wilshire 5000 example).

Dividends are the unsung heroes of the stock market – you know, those things your grandmother used to concentrate on when she bought utility stocks. Leaving them out of any analysis like this is silly, even for a tech-heavy index like the NASDAQ. From March 1999 until today, you’d be ignoring an additional 7.08% of gains had you simply considered reinvested dividends.

So, yeah – that’s the real story. Watch the stories, especially as the NASDAQ contains more mature tech firms… and more non-tech firms, at that.