The US stock market has certainly been on a tear lately. The Dow Jones closed the day at a new record of $12,961. Yes, that’s higher than its pre-”Internet Bubble” peak in Jan. 2000 of $11,719.

Many US stock market bulls point out that if you had invested at the Dow low in Oct. 2002, you would have earned a 70% return on your money in the last four and half years. That’s an annual return of 12.5%. Pretty good, eh?
Here is the chart of the Dow Jones Industrial Average from 1999-2007:

But the 70% return is only a nominal return, priced in US Dollars. It doesn’t count the fact that the US Dollar is getting weaker relative to other currencies and commodities. For example, the same 70% return priced in Euros would only be 23% (4.7% per year) with the Dow priced in Euros:

The outlook is worse still when you price the Dow in gold, an alternative form of money. Priced in gold, the Dow has dropped 21% (5.26% per year) since its 2003 low and has lost a whopping 53% (10.0% per year) of its value relative to gold since its 1999 peak. Is this really the recovering US stock market that people are talking about?

The fact of the matter is that the US stock market is losing value relative to gold, oil, real estate - just about any hard asset. The Dow, which is made up of productive companies, is supposed to outperform a barrel of oil, right? But in fact I would have more purchasing power right now if I’d bought a barrel of oil in 2003 and stored it in my basement than if I bought into the US stock market.

The nominal gains in the US stock market do not represent real increases, but instead reflect the weakening of the US dollar, which is approaching record lows against almost all of the major world currencies. The name of the game in investing is increasing the purchasing power of your investments over time. And the US stock market won’t win this game for many years to come.