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Gems Wealth: 105 Years of Dow Jones Industrials
105 Years of Dow Jones Industrials
Have a look at this 100 year (actually, 105-Year) chart. I colored each "Market" appropriately -- Green for Bull, and Red for Bear -- to more clearly show what happens. Bull markets get ahead of themselves. At their ends, they tend towards excesses that take a very long while to recover from. When a long Bull runs end, it takes quite a while before the next one begins. Some of this is related to the destruction of capital crashes cause; Much of it has to do with the psychological damage suffered by investors. As we have seen more recently, that damage -- plus 46 year low interest rates -- helped push former market investors into real estate. We have yet to see their unbridled love affair with sotcks rekindled. What will be the catalyst to get them back into equities? My best guess is a sustained move upwards. Regardless of the actual cause, in the past century, every Bull Market has been followed by a significant refractory period. From the looks of the time-lengths of red, it appears almost generational in nature. The damage is repaired when a new crop of investors -- without crash scars -- finally appears. Is it possible that an 18 year Bull market (1982-2000) could be followed by a 2 1/2 year Bear (March 2000 peak to October 2002 low), and then launch into another multi-decade (2003-2018) Bull? Sure, anything is possible. But as the chart above plainly shows, it would be historically unprecedented. One other thing worth noting: The steepness of the gains from 1924-1929 are very much parallel to the 1996-2000 moonshot. Both ended with near 80% drops (Dow for 1929, Nasdaq for 2000). It took 25 years -- until 1954 -- for the Dow to regain its 1929 highs. I don't believe it will necessarily take that long for Nasdaq -- but I am aware of the outside possibility. Sources: The raw data for this comes from Stock Trader's Almanac, which Jeff Hirsch kindly provided. The concept for this was shamelessly lifted from Rydex. But their chart was flawed -- I found where they delineated the post 1929 crash Bull and Bear Cycles, and the post WWII Bull, was wanting. Rydex's chart had a 25 year post-1929 Bear, followed by an 11 year post WWII Bull market. That seemed wrong, especially whent he market had been going up for much of that 1940-1946. So I adjusted the start to more clearly reveal the post WWII Bull beginning around 1946. Picking a beginning to the Bull is subjective -- you could start it from 1940, or from the 1942 low, or the 1943 high, but then it includes a major correction in 1945 -- the Dow dropped from over 211 to 163 (23% -- but not in a day, like 1987). So while I could have placed the beginning as late as 1949 or as early as 1940 or 1942/3, I somewhat arbitrarily placed the start of the Bull at 1946 . . . Where does the Bull Market start?
comments: My problem with these kinds of analysis is that you can get many different results depending on your perspective. You could have bear weeks and bull weeks. Or, this could be looked at as one very solid bull century.
from the same author in 2003: The Really Big Picture: When was the last time you thought about the long-term history of the market? We sometimes forget about that aspect of the market, getting caught up as we do with ordinary business of life. Between corporate earnings and the usual parade of economic releases (GDP, Productivity, Employment, etc.), it is quite easy to lose sight of the bigger picture amongst the day-to-day noise of the markets. Indeed, the Stock Trader’s Almanac, like the Farmer’s Almanac before it, is based upon Twain’s observation that “History doesn't repeat, but it sure does rhyme.” The historical record can often provide insight into present conditions. I thought it might be advantageous, therefore, to step back to consider "The Really Big Picture." Begin by observing the chart below, covering the Dow Jones Industrial Average for most of the 20th Century (1921-2003). Unlike most charts, this one is “logarithmic” -- it keeps proper proportions between every time the market doubles. The distance between 100 and 200 is the same as that between 1,000 and 2,000. Typical (geometric) charts tend to look toppy when viewed in the long term -- even backing out the post 1999 period. A panoramic viewpoint makes it obvious that Markets go through long phases -- bullish, bearish and sideways -- lasting anywhere from 5 to 18 years. Last century saw three secular Bull markets: The first lasted from 1921-29. The Dow went from 75 to 350+ -- a 367% gain over 8 years. The post WWII Bull market 16 years later, and ran from 1945-63. It propelled the Dow from the low 200s to 1,000. That 354.5% gain occurred over 18 years. The next Bull market began some 19 years later in 1982. The Dow starting at 1,000, and by the time the Bull ended in 2000, the Industrials had peaked at 11,750 -- a whopping gain of 1,075% in 18 years. Human progress is inexorable. That explains why the overall bias of the market is up. It also rationalizes why Bear markets tend to be sharper -- and much shorter -- than Bulls: The Crash of ‘29 was followed by 4 consecutive down years (a feat not matched since). From a peak of 386 to trough of 41, the Dow declined 89 percent. By contrast, the recent Dow drop from 11,750 to under 7,200 was “only” a 38.7% fall (although Nasdaq got spanked worse, losing 78%). Compare that with the near 50% Dow declines of the early 1970s (1067 to 570 for 46.5%) or the late 1930s (195.6 to 97.5 for 50.1%). Ned Davis Research has looked at many of the major Bear markets worldwide for the past Century, and found that they tend to last about a third as long as the preceding Bull. As a rough measure, that’s consistent with my findings regarding the Dow this past century. Despite the Market’s overall upwards bias, many investors seem to overlook the extended periods of predominantly sideways action: The late 1930s saw an attempt to breach 200, which was unsuccessful until 13 years later (1950). In fact, the Dow did not get past its pre-1929 crash peak for 25 years (1954). A similar phenomena occurred after the post-war Bull market. The Dow kissed the 1000 level in 1966, but was unable to permanently penetrate that plateau for 16 years (1982). There is a noteworthy aspect of each of these two range-bound periods of sideways trading action: Each followed extended Bull markets; each also occurred while the United States was involved in a major military conflict (WWII and Viet Nam). The “Buy & Hold” mantra is tough to argue with during an 18 year Bull market. During the 1982-2000 period, indexing and Buy & Hold were the strategies that succeeded best. Despite the brutality of the recent Bear market, some adherents still cling to this philosophy, despite their recent pain. Indeed, a recent Bloomberg column suggested that the 6 month, 45% rally in the Nasdaq validated the “Buy & Hold” philosophy. I disagree. As the chart makes clear, there are periods when that strategy will deliver sub par returns. The rally off the March lows, and the nearly 100% gains since October 2002 still leaves the Nasdaq more than 60% below its peak. Its a textbook case of “been down so long it looks like up to me.” Despite nearly doubling, the “Buy & Hold” investor who made purchases in early 2000 have still lost more than half their capital. Those are not the numbers that support a blind methodology. John Maynard Keynes famously quipped: “In the long run, we are all dead.” To most investors, the long run is not what truly matters. Rather, it is the next 20 years. This is especially true for the 40-50 year old Baby Boomers, who will be retiring in 2015-2020. What the market does between now and then is of penultimate importance to this group. The panoramic view leads me to the present conclusion. Following an 18-year Bull market, and a three year Bear market, we are now committed to what looks like a long-term military obligation in Iraq. In the grand scheme of things, I suspect we are in for a harder long-term slog than the mere 3 year Bear market suggests. Historically, this suggests an extended period of range bound trading as the highest probability long-term scenario in my view. I expect vicious rallies, and wicked sell-offs to occur -- over shorter term cycles -- within the larger timeline. Active management and capital preservation are going to be the key methods of outperformance.
DJIA 1921-2003 (logarithmic chart) Source: Bloomberg Analytics Unlike most charts you see, this one is logarithmic meaning that it keeps the proportions the same each time the market doubles. The distance between 100 and 200 is the same as that between 1,000 and 2,000.
from the same author in late 2005:
1966-1982 Trading RangeHere's the 1966-1982 trading range: > chart courtesy of Rydex Funds
If we are in fact in a long, post-Bull trading range, then this is year 5 of what could be a 10-15 year secular Bear market. As the 1966-82 trading range above shows, we may be in for violent moves down and rapid blast offs. The March to December 2003 cyclical move higher is very consistent with this trading environment. I am placing us somewhere around late 1972 . . .
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