There can be no denying the exuberance of our stock
markets and particularly that of the United States, which is presently
experiencing a sensational bull-run absolutely without historical precedence.
The current 98 month economic expansion is the longest expansion in peacetime
history.
In past seminars and other resources, I have
examined the Dow Jones Industrial average and attempted to give some idea as
to the incredible growth experienced in that index this decade, while trying
to add a perspective that is gained when weighed along
side its performance the rest of this century.
The Dow Jones is an index of 30
"blue-chip" US stocks. At 100 plus years, it is the oldest
continuing US market index.
The Last 98 Years
It was April 6th this year 1998 that the NYSX
finally closed above the much-anticipated 9000 points. Refer to Graph 1.
The best perspective can only be gained taking the
longest view. The graph looks at the close of the Index on the same night
(April 6th) every decade this century
It starts 98 years ago, on the night of April 6th
1900. That Friday afternoon the Dow Jones closed at 66 pts.
It starts 98 years ago, on the night of April 6th
1900. That Friday afternoon the Dow Jones closed at 66 pts.
- April
6th 1918 : close 77 pts.
- April 6th 1928
:close 212 pts (in the late 1920’s bull-run)
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- In 1929 the index peaked in
at 381 pts and after the crashed triggered in October that year,
eventually bottomed at 41 pts in 1932. This was a
89% drop in just 3 years taking the index to a lower point than it had
started the century 32 years earlier.
- April
6th 1938 :close 106 pts
- April
6th 1948 :close 178 pts
- It was not until 1983, some
35 years later that the Dow was to permanently breach 1000 points.
- April
6th 1988 :close 2061pts
Short-term peaks and troughs aside, to this juncture
the index had performed solidly, and had been fairly equally matched by the
productive output of industrialized America as depicted by the Gross Domestic
Product.
But it has been this decade that the Dow has really
taken off, seemingly dislocating itself altogether from the GDP as
illustrated in graph 1.
- April
6th 1992 : close 3275 pts
- April
6th 1996 : close 5682 pts
- April
6th 1997 :close 6526 pts
- April
6th 1998 :close 9033 pts
Dow Jones Industrial Measured in Gold
It needs to be remembered that the GDP is measured,
just as the Dow stocks are bought and sold, in US$. In the 2 ½
decades, since the US$ was removed from the last of it’s backing to gold, we have seen an
enormous growth in money supply, accounting to a large degree for this
exponential growth in stocks.
Many view gold as rising and falling in value, as
expressed on the news each night, by how many dollars would buy 1 oz that
day. Yet others maintain this is more an indication of the changing value of
the Dollar that is buying the gold, as Gold itself is a constant.
This century, as with any before it – gold
– more so than any other commodity or currency, has remained very
stable in it’s
ability to buy a given amount of goods or services. It is argued that, to
fully appreciate the value of a service or product it needs to be measured along side gold. This is also true of a market and
particularly today’s stock market.
In 1900, with gold fixed at $20 oz, just over 3
oz’s of fine gold would the entire index. In the 20’s the index
became more expensive till at its peak in 1929, it took 19 oz of gold to buy
the Dow.
At the markets 1932 low it took just 2 oz to buy the
battered index.
In 1971 President Nixon broke the last of the US
dollars link to gold, which has lead to US money supply being expanded many
times over.
In 1993, with the US dollar floating to gold, it
took 9oz of gold (converted into US dollars) to buy the Dow.
Remember, at the market high of 1929, it took 19 oz
to buy the Dow. In 1998 it will cost you an incredible 30 oz of fine gold
to buy the Dow Jones (at around $300 per oz).
The Lessons of History
King Solomon said "there is nothing new
under the sun. That that is, is that that will be again." The cycles
of a stock market are larger than ones lifetime and
therefore out of the reach of one man’s memory. This is what makes historical
understanding so
important.
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Some thoughts when examining the stock market with
a 98 year perspective.
- The crash of 1929 – 32
saw a nearly 90% reverse in the index to the down side. That today
would put the Dow at 1000 pts. There are many, many more
non-professional (1st time) investors involved in
today’s market.
- It took 26 years to 1955
for the market to reach again it’s
1929 high. People preparing for their retirement in the late
1920’s - were dead.
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- There is simple and time
proven statement that says "after every great bull market there comes a great bear market". Next time your
investment or stoke broker advises you to buy and hold stocks for the
long term, ask yourself this. "When today’s market reverses
and if it repeats 1929, are you prepared to wait till 2024 for your
mutual fund to return to what it is today?"
- There are those that believe
that if there is a stock market crash tomorrow it would be little worse
than 1987. The 87 crash never became a deep drawn out bear market as we
experienced in the 30’s and amounted to little more than a glitch
at the at the beginning of the bull market we are now in.
- The number of new Investments
Trusts or Mutual Funds as they are called today boomed in the later days
of the 20’s bull market.
By all accounts, historical and otherwise, the paper
investment markets are highly valued and now over due a major correction.
There can be no telling at what point a market is going to turn and starting
heading south. For some time this market has defied the bears, and it may
continue to do so for some time, although I see no reason why it should. I
learned it is easier to lose money than to make it, so I tend to ere on the
side of caution.
Philip Judge
Anglo Far-East Company
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