It’s hard to rightly estimate whether the stock market is cheap or expensive.  Too often, when we look at it, we are often too close to it. On any given day, it’s like looking at a large work of art in a museum — standing too close to the work of art.

So for a better perspective, let’s look at a Chartoftheday that shows the Dow Jones Industrial Average (the “Dow”) adjusted for inflation since 1925. This gives us a much better, long-term perspective.

When we do this, we see several very interesting realities.

First, when the Dow is adjusted for inflation, the bear market of the late 1960s, 1970s and early 1980s was almost as severe as the one that hammered investors in the early 1930s.

Second, when adjusted for inflation, the Dow is a little more than double where it was at its 1929 peak and, today, trades only 54% above its 1966 peak.  This is not particularly wonderful performance, given the length of time.

Third, the Dow is up 57% from its March 9, 2009 low, which, when inflation is taken into account, is only slightly more than what the Dow gained from its 1966 peak to today.

So, is the stock market overvalued?

For people who have no hope in the future, it is. However, for those of us who keep hope alive, the stock market seems rather cheap.

What do you think?

I want to share hope with my readers.  Though I am no Pollyanna, the hope I wish to share is, specifically, with those who are saving for retirement and who may have become despairing during the last decade over what has happened in the securities markets. 

For sure, there is much reason for concern.  But there are glimmers of hope.  With 4th quarter, 2009, earnings reports from U.S. corporations now largely behind us, the chart, above, may give us a longer-term perspective.

Today’s chart (from Chartoftheday) illustrates how shockingly much earnings declined  from the third quarter of 2007 (their peak) to the first quarter of 2009 – 92% - - the largest decline on record, with data going all the way back to 1936.

However, since the first quarter 2009 low, company earnings have expoded (up over 600%) and currently are at levels that have been exceeded only during the late 1990s with the dot-com frenzy and the years preceding the more recent credit bubble.

As we all know, there are still lots of serious economic problems lurking out there, but there is some reason for hope, as well.

After such a nice start to the new year, with the market up a few percentage points by mid-January, it has had a fit.  Yesterday, it drooped significantly; today it was down big again, yet staged a stunning recovery. Is there more madness to come?  Dunno.

As you know I’m not interested in following the rocket launches or death spirals that our stock market seems to throw up or down from time to time. I am interested that you invest - because I think that is a stewardship responsibility for your future.  (And by the way, my book can help.)  I am also concerned that the current movements of the market scares a lot of  unsophisicated investors (even out of the market) and not a few very experienced pros, as well.  It shouldn’t be this way.  Life should be easier and more predictable.  But it isn’t. 

I’m still believe this market flopping and chopping is part of the using recovery process as markets and an economy that has had a major heart attack undergoes convalescence. 

Also today, unemployment numbers came out for the month of January - more chopping and flopping!  There was some good news:  the unemployment rate dropped.  But there was bad news, too: the number of people losing jobs is higher than we had hoped or expected.  All this goes to show that we have lived through and are still living through no ordinary recession.  Compared to earlier economic drops, as the “Chartoftheday,” below, shows, things (especially employment) are worse than usual this time.  But maybe – we hope — they’re getting better.

God bless you all.