A strange thing happens when the Dow Jones reaches a round number. Usually the market has climbed steadily for several years through the stratosphere. In a period of a decade or less the DJIA may have doubled several times and everyone may be talking about how the sky is the limit, expecting the doubling to continue ad nosieum. Then the market just stalls.
To see this, take a look at the long-term DJIA: http://stockcharts.com/charts/historical/djia1900.html or the table at http://en.wikipedia.org/wiki/Closing_milestones_of_the_Dow_Jones_Industrial_Average.
Note that after reaching 100 in the 1906, it took until 1927 to cross 200, and until about 1950 before the DJIA moved and stayed above 200. Likewise, after crossing 1000 in about 1972, it was 1987 before the market reached 2000. In 1999, the market reached 10,000. Now we sit 10+ years later, and the market is far from crossing 20,000. If history is any indication, it may be 2015 or even 2045 before we see 20,000!
Note from the charts that before reaching the round numbers the markets made a steady climb, year-after-year, then made a sharp increase to cross the new plateau. Then everything seemed to stall, and there were a series of fits and starts before the market resumed its climb.
The causes of the booms and busts were different. In the early 1900’s, the start of the industrial revolution started widespread public stock ownership. As companies grew and prospered, sophisticated investors emerged, pumping money in the markets. As the cycle went from healthy growth to bubble, stocks surged. People borrowed money to buy more shares, effectively creating higher market caps than could be supported with the money in existence. Eventually the markets ran out of steam as the loans came due and huge losses were realized due to margin trading, leading to a fall and the Great Depression.
In the 1950’s, individuals returned from the War and started to invest and grow the economy. Huge new corporations sprang up, bolstered by the strong work ethic of the workforce, and multinational corporations began to develop. Government size also began to grow, raising taxes until the top tax rate approached 90%. Eventually the high tax rates, compounded by a loose monetary policy that drove inflation, caused the market to sputter to a stop. The market then drew lines for 15 years until inflation was brought under control and taxes were lowered.
In the 1990’s, loose monetary policy started after the 1990-1991 recession caused money to be pumped into the stock market. The internet boom with companies going public and quadrupling overnight brought new investors into the market. Suddenly everyone was a day trader. This all came to an end when interest rates were raised and people started to realize that the dot com companies they were investing in would probably never make a profit and it would be 50 years even for the best companies to make a large enough profit to justify their market caps.
We find ourselves in the middle of a long, flat period, hovering at the 10,000 range. History has shown that a significant period of growth is probably around the corner, but it may be a fairly long wait as the speculative excesses are wrung out of the market and true growth and productivity resume. Taking a long-term perspective, this is the time to accumulate shares, buying on the dips and regularly putting more money into the markets. Once the DJIA has crossed 20,000 on its way to 100,000, all of the little dips and wiggles we are seeing now will look no bigger than the fluctuations in the 1970’s. It is this type of consistency that will lead to the big returns. Those trying to jump in and out will miss the truly big moves up.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.