Graphing historic DJIA prices on a semi-log plot shows that our financial markets experience a price wave with a 20 year period superposed on a steady long-term growth trend.
Yesterday was the first day that the Dow Jones Industrial Average (DJIA) managed to close above 11,000 in a long time. It had been flirting with that level for almost a week, now, and had crossed that level several times intraday, but never held it through the close of trading.
The media, of course, made a significant bit of noise about it - enough that my wife asked me, after reading the headlines in the local newspaper, whether it really was a good thing. Now, my lady is quite bright (she's working on her second Master's degree), but, as a humanities major, her long suit is not the kind of quantitative analysis necessary to interpret what moves in various economic metrics, such as the DJIA, mean to actual people trying to get by.
"Is the Dow over 11,000 a good thing?" she asked.
"Yes, but it doesn't really mean much," I replied. "I predicted it'd spike over 11,000 a month or so ago, then slide back. But, things are pretty much on track."
Analysis I did last fall (see image above) indicates that the DJIA is just about exactly on its long-term track. It should be just peeking above 10,000 right about now. Since we've just experienced a short spike down (You do remember we've experienced a recession over the last year and a half, don't you?). We can expect an overshoot on the recovery, then settling back to the long term trend modified by a chaotic wave with a period of about 20 years.
In the future, we can expect to see a slow rise with a long term trend of zero to a few percent for about the next five years. The trend should steepen thereafter, reaching a maximum about 2020. In the meantime, expect the DJIA to be in a trading range between 9,000 and 11,000.
The important thing to understand is that the huge price swings that many of us capitalized on over the past 18 months are unlikely to repeat, barring exigencies. Since stock traders make money by cleverly exploiting stock volatility, they won't do quite as well as they have over the past 20 years. Expect the real money to be made by investing in dividend-paying stocks. Expect portfolio returns in the 5-15% per annum range to be the norm. A good model for this investing environment would be the rather boring period from about 1965 through 1980, when the DJIA stayed essentially flat, with only short term ups, and downs.
Sorry, folks.
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