From 1,700 to 17,000. That’s where the Dow Jones Industrial Average (DJIA) has travelled during my seemingly brief investment career.
During this 1,000 percent gain in stock prices, we’ve experienced three major price cycles, each commonly defined by the price collapse that preceded or followed it.
And each of those price declines is commonly mischaracterized in some way.
In 1987 we had The Crash. From August to October that year the DJIA dropped 1,000 points. On the October 19 afternoon of Black Monday, I sat with a group of really old stockbrokers (probably about 45 or 50 years old) and listened to them plan new careers.
People easily forget that the DJIA actually finished 1987 with a gain. I’m glad I didn’t take their advice.
The next cycle was a long one. From 1987 to 2000 we went without a serious market decline. The DJIA increased from the 1987 low of 1,700 to a peak of 11,700 in January 2000.
Then came the poorly named Internet Bubble. The DJIA dropped 35 percent over the next almost three years. The permanent recovery from that drop would take 13 years—a bit longer than The Crash of ’87.
The “Internet Bubble” misnomer masks the underlying problem with the stock market in 2000 and the cause of the long recovery. The problem with the DJIA in 2000 was not the ridiculous valuations being assigned to new technology companies with no history, no earnings and sometimes, no revenue.
The problem was the ridiculous valuations being assigned to blue chip stocks with long histories, lots of earnings and predictable revenue.
Investors lost more money buying Coca Cola, Microsoft, Exxon and Walmart in that 2000-2002 collapse because they paid prices for those businesses that ridiculously exceeded their values.
When you overpay for an asset it can take a long time to recoup future losses.
In the midst of the 13-year recovery from the bursting of the Internet Bubble, we had the Mortgage Crisis, with the Dow dropping from 14,000 in 2007 to a low of 6,600 in 2009.
But the term “Mortgage Crisis” is another gross oversimplification. The bursting bubble that actually triggered the stock market meltdown was an effective shutdown of the overnight institutional money markets. An industry built on trust came to a halt because institutions no longer trusted each other.
From that market bottom in 2009, the DJIA has sprinted from 6,600 to 17,000. People have short and manipulatable memories. Only now are we beginning to see individuals return to stocks in record numbers.
Perceptions change. Somehow 50-something years old doesn’t seem so ancient any more. Zeros and commas are less intimidating than they once were.
No one knows when we will experience the next market collapse, but what might the next quarter century bring?
Over the past 50 years and 100 years the annual return index was between five and six percent.
Assuming a five percent annual return, 27 years from now some guy in his late 40s will be telling a young analyst that Dow 63,000 isn’t sustainable. I hope the kid ignores the old man.