For Overseas Investors, A 10,000 Dow Is Lost In Translation

American investors have plenty to be happy about with the Dow at 10,000, but owners of U.S. shares who are based overseas aren't feeling the love - for those investors who measure their wealth in something other than greenbacks, the rally hasn't been as strong.

The drop in the dollar has cost investors in the U.S. market eight or nine percent in the past year. The graph below is based on the large-cap market indexes of MSCIBarra, but they correspond closely to the movement of the Dow 30 and S&P 500. The green line measures the U.S. market in dollars, while the gold line translates the value of the U.S. market into euros, and the index value that is higher in the graph reflects the weaker currency.

The dollar's weakness (due to all sorts of reasons I don't have space to go into here) has been costly to overseas investors. From the bottom on March 9, 2009, the U.S. market has rallied 61 percent in dollar terms, but just 37 percent when measured in euros.

The U.S. market also comes up short versus its competition overseas. This table compares the one-year and 2009 year-to-date returns for the U.S. market to the MSCI EAFE index (measuring markets in Europe, Australasia and the Far East) and all the markets in the developed world excluding the U.S.

Investing in the US has cost non-dollar investors between six and eight percent this year. Also note the other side of this coin, namely that investors who are dollar based came out way ahead if they had bought stocks in far-away markets.

Actually they didn't have to travel that far - the Canadian market did pretty well this year, up 52 percent for 2009 through October 14, and up 42 percent or the past 12 months.

One more comparison -- John Authers of the Financial Times tells us that the Dow looks even worse when measured in terms of inflation-adjusted dollars, as well as gold:

...10,000 is not such an impressive landmark. It reached that level for the first time in March, 1999. On a price basis (excluding dividends) the Dow has lost 23.5 per cent in real terms since then, once inflation is taken into account...

And most dramatically, its value in gold terms (derived by dividing the index by the price of an ounce of gold) has collapsed by 73.5 per cent since then. So the Dow's recovery has been achieved in many ways only by the debasement of its own currency.