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The Dow Jones Industrial Average set a new all-time high Tuesday, almost exactly four years to the day after the market lows of the financial crisis. Should investors care? Not really. Valuation levels are a far better indicator of future performance.

Success in equity markets lies in buying the largest stream of earnings for the cheapest possible price. The nominal value of an index or individual stock is irrelevant without knowing the earnings underlying the price. The fact that a stock trades at ten dollars tells us nothing, whereas a stock trading at 35 times earnings tells us to stay away.

The Dow is currently trading at 13.7 times trailing earnings, about three points below its 20 year average.

This scatter chart shows the ability of price-to-earnings ratios to predict the future 24 months of Dow performance (using 20 years of data). The downward sloping line of the results indicates that the lower the price earnings level, the higher the future returns for the index. The analysis suggests that price earnings levels explain a not-insignificant 40 per cent of the performance of the Dow.

New highs for a major benchmark are always welcome and in this case provide another sign of improvement from the prolonged nightmare of 2008. But for prudent investors it's just another number – a starting place for further study.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.

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