DJIA without a 2% One Day Decline
I have been meaning to post this since December, but never got around to it: We're now at 930 or so trading days.
Courtesy of Birinyi Associates
Wednesday, January 31, 2007 | 10:30 AM | Permalink
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This makes sense...it's been 2.5 years without this kind of overreaction. The pinnicle of irrational (emotional) selling occured at the "Duct Tape Bottom", around that time. At that point, stocks were being puked out...this was our last view of Joe Sixpack in the equity markets. Everyone who needed to sell did it then (margin machette)...they all then went to the "easy" trade of bonds and housing. I believe that Mr. Sixpack is looking to be back in equities, now that housing is toast....so he buys dips, creating support.
Posted by: Fred | Jan 31, 2007 10:57:04 AM
Perhaps we merely have a more efficient market. With more information, maybe fewer people make mispricing mistakes. Fewer mistakes => fewer/smaller corrections.
How many decades since we had a depression??? Statistically speaking, we are far overdue. Does this mean we should expect one soon? I doubt it. Past performance/corrections is not a guarentee of furture events.
Posted by: schunder | Jan 31, 2007 11:11:49 AM
j6p is out of equities for a while (outside of automatic 401k contributions). the tech bubble is still too fresh in his mind. besides, best buy is having a deal on plasma's this week ahead of the superbowl. gotta fuel up the extended cab 4x4 truck he bought on the employee discount program for all and head on down.
Posted by: emd | Jan 31, 2007 11:25:09 AM
More things change more they remain same.Since knowledge growth is cumulative every generation makes the mistake of thinking they are smarter than the one gone before since they know more than their predecessors.A new mirage, a new bubble
followed by an inevitable shock collapse and the cycle repeats ad infinitum or at least as long as mankind is around.
Posted by: jagmohan swain | Jan 31, 2007 12:02:06 PM
No one seems to cover impact and significance of the derivative market. At $400 trillion+ now, it's "storing" considerable amounts of risk and is evidenced by surface placidity in the Dow, etc.
Posted by: Chief Tomahawk | Jan 31, 2007 12:02:35 PM
interesting
according to that plot, in the 106 years since 1900, the average rate of increase in the DJIA has been ~1.04 %/y [200*1.04^(106) = 12780]. Based on anecdotal evidence from friends, advisors, etc, I was under the impression is was closer to 10%
Posted by: marcello | Jan 31, 2007 12:07:00 PM
Marcello, I don't think that's what the graph is telling us.
Posted by: Teddy | Jan 31, 2007 12:33:55 PM
Marcello,
You're not adding dividend yield. Add dividends & you'll get that 1.04% up to something like 3.5%...but then remember to adjust that down for inflation...
IM
Posted by: inquiringmind | Jan 31, 2007 12:42:08 PM
This is a liquidity story because markets don't change since people don't change. Yes, information is more available now than in the past but it works both ways when the news is bad. The problem is is that we had a few years of all good news and now investors prefer to ignore any bad news. Not sure when the market will wake up or what will cause the music to stop but this liqduity freight train is out of control.
Posted by: lloyd | Jan 31, 2007 12:50:16 PM
Marcello,
In 1900 the Dow was about 50 (http://stockcharts.com/charts/historical/djia1900.html)
This implies an average growth rate of about 5.3% (50*(1.053)^106 ~ 12000). This doesn't factor in dividends; not sure what these contribute to the total return.
Posted by: sn | Jan 31, 2007 12:52:57 PM
The year you start and finish has a major impact on the final number annual number.
Try the math for a 100 years, starting with 1900-2000, then do 1901-2001, 1902-2002, etc.
Figure in dividends and you should end up somewhere between 10-11%.
Posted by: Barry Ritholtz | Jan 31, 2007 1:23:56 PM
With the developed world and China aging rapidly, we should be in for a long bull market in assets
Posted by: Lord | Jan 31, 2007 2:48:41 PM
Actually, there was a pretty major slope change around World War 2. In the DJIA, it took from 1900-1945 to triple (going from 50-150), then from 1945-2007 it has almost multiplied by 9. That's 2.5% before 1945, and 7.4% since.
This is much more obvious in the total return of the S&P 500, which changed from 6.7% before 1945 to 11.6% since.
Posted by: F | Jan 31, 2007 2:50:53 PM
The graph is telling us that we might be entering a 70s rerun with special effects than 1930s.
Posted by: Oil Shock | Jan 31, 2007 3:06:05 PM
Bernanke 1 year Report Card?:
I give him an A-
He's playing this like a Stradivarius.
His only blemish was spilling drinks with the Money Honey. He will go down as one of the finest, imho. What a pleasant contrast in styles to Greenspan.
Posted by: Fred | Jan 31, 2007 3:17:28 PM
Well look at that. Dumbya staggers around the floor of the NYSE, Lil' Ben&Company come out say Inflation is now moderating (I wonder if the Bond Market is buying that) and it's Blue Skies, Sunshine and Sugar Plum Faries again.
This escapade looks familiar. Like when the Jack-Ass In Chief landed on the USS Lincoln (in his flight suit) soon after "Major Combant Operations" had ended in Iraq -- With a Big Banner in the Background:
"Mission Accomplished".
Posted by: John | Jan 31, 2007 3:28:02 PM
In the age of hedge funds, there is simply going to be less volatility in the market. Up or down it is going to be a smoother ride.
Posted by: beachbum | Jan 31, 2007 4:09:24 PM
Oil Shock: "The graph is telling us that we might be entering a 70s rerun with special effects than 1930s."
OS, I've read it five times now, and I don't believe it contains a thought or a sentence. Care to try again?
Posted by: Ollie | Jan 31, 2007 4:12:33 PM
MY BADS.
1st bad : I meant of course "4%" (or factor 1.04)
2nd bad : read DJIA off incorrect axis.
Yes, (sn) is correct and it's closer to 5.3% from 1900, less inflation of course. Still less than I expected. What have bonds yielded on average in that time ? Adding in dividends is a good point if one is concerned with return on your dollar.
Sure, the subranges vary quite a lot. But I was looking for an overall trend line starting from the _beginning_. It's been around 9% yoy since 1945, even faster recently. One hopes that "things are different now" and it won't "revert to the long-term mean" =:-o
Posted by: Marcello | Jan 31, 2007 5:02:35 PM
followup on DJIA trend
Signaltrend.com states that from 1896-2006, DJIA increased "on average" about 7.5% yoy.
that is closer to my a priori expectation. out of curiousity it would nice to see bond performance over the same period
Posted by: Marcello | Jan 31, 2007 6:10:35 PM
The new economy market, the Nasdaq, has returned about 4% per year over the last three years. On a risk adjusted basis, you would have been sorely paid to invest in the Nasdaq. After an entirely technical reflex rally in 2003, the Nasdaq has effectively done nothing. Instead we hear how tech of all sorts is dead. Buy oil and railroads. Now high energy propels society's wealth as do railroads. Hmm...
Now we have rampant enthusiasm amongst many "retail" sorts including many who post on here. Consumer surveys, notorious for peaking with equity markets, are coincident with said posters and are at multi-year highs.
One of the greatest Wall Street minds of all time segmented equity moves into Bull I II III and Bear I II III. He surmised smart money was confident in the early bull cycles and fearful in the late bull & early bear cycles. Alternatively, dumb investors were just the opposite. They got their legs underneath them after the big gains had been made and remained bullish through Bear I and II as they rode the great pig down only to sell near the bottom when smart money was accumulating.
The broad market comprising technology and thousands of small caps has a return of zero since May of 2006 yet the crowd is screaming for more risk. They are going to get more risk.
Posted by: BDG123 | Jan 31, 2007 6:12:20 PM
Actually, the DJIA has increased at a 6.2% annual rate since the end of 1896 (exactly 100 years). From 1896-1946 it was 3.6%, and from 1946-2006 it was 8.9%. Not counting dividends, of course, which used to vary between 3 and 6%, but have been hovering near 2% for the last decade.
Posted by: F | Jan 31, 2007 6:25:07 PM
we will probably get the big drop of 10% or so on thursday or friday of this week. really.
Posted by: Patu | Jan 31, 2007 8:35:13 PM
I think what OS is saying is that he sees a pattern in the chart. Extended (700+)days without a major correction seems to occur during a sideways trend which last occured in the 70's.
It seems like in the 70's cyclical bulls occured much like 2003-2007...without any major corrections. I would love to know more about the cyclical bear during the 70's secular bull. How many consecutive trading days where there without a 2% rally??
Posted by: garyt | Jan 31, 2007 11:39:47 PM
good timing Barry, much too bullish accross the board here and now that Erin used the "N" word today all bets are off!
The inflation genie is out of the bottle, Gold back to $ 700+ by Sept. 1
Ben is but another useless tit on the boar!
Posted by: Rick | Feb 1, 2007 12:31:10 AM
now do we go short barry, this mirag-e as Bugs Bunny use to say is a joke!
Posted by: Rick | Feb 1, 2007 12:32:31 AM
How many decades since we had a depression???
According to Friedman, the reason for the depression was that the Fed cut the money supply by 30% and refused to print us out of it. I don't think there is much chance of that happening these days
The only other thing that could probably cause depression is loss of confidence in the dollar and since most people are oblivious to how their money and central banking works it doesn't look like that will happen anytime soon
Posted by: DavidB | Feb 1, 2007 2:43:37 AM
A depression could come very easily.
If FCBs and others diversify heavily out of dollars, long interest rates could rise a lot, then rise more on the inflation premium.
Much more expensive imports, 10%+ interest rates and paying the price for high debt levels and negative savings rate in foreclosures and asset liquidation could easily bring about a depression of some flavor.
Posted by: Paul | Feb 1, 2007 8:17:47 AM
Oh my...."fascinating" commentary here!
Place your bets.
Posted by: Fred | Feb 1, 2007 9:46:00 AM
swain wrote:
"every generation makes the mistake of thinking they are smarter than the one gone before"
Hogwash! We ARE smarter! In medicine, engineering, science AND in economics each generation IS smarter than the preceding one. Tons of papers have been written on the subject of risk. We ARE smarter about risk taking. It seems very reasonable to me to expect that Goldman Sacks, Merril Lynch, pension funds, etc. can handle risk much better than they could even a decade ago. If the big boys aren't overpaying - we small fries probably aren't playing.
Also, regulators are getting smarter. We also have Sarbanes-Oxley. Our government does not want severe gyrations in the markets. Anyone who expects gyrations today to be comparable to gyrations of the 60's and 70's is essentially saying: "the goverment is totally incapable of making the markets smoother. No matter what the government does, we should expect the idential market gyrations (on a statistical basis) forever and ever."
This too is hogwash.
930 trading days without a big drop? You can read it as meaning we are due for a big drop. I read it as meaning the market is good at reducing the severity/frequency of big drops.
60 years since a severe polio outbreak? OOOOOHhhh we are really due for a biggy? No, the proper interpretation is mankind - wonderful mankind - is great at fighting polio.
Humankind is also great at fighting problems in the markets.
Posted by: schunder | Feb 1, 2007 3:38:32 PM
I'm glad you have so much confidence in Wall Street and your government. They did such a fantastic job of protectiong you from an 80% decline in the Nasdaq that ended just four years ago that I too am confident they will change my diaper, provide me a job where I make millions and by sheer will protect me from my own stupidity.
Posted by: BDG123 | Feb 1, 2007 6:53:57 PM
Interesting. The last time we went this long, the market was flat for 20 years.
Posted by: Brian | Feb 1, 2007 9:15:58 PM
BDG123
The government did not protect me from any 80% drop. I protected me. My condolences that you did not pay attention to risks and lost 80%. You refered to your own stupidity; take my advice and put your money in a broadly diversified mutual fund. If you are stupid, you are likely to find yourself in another problem if you make your own investments.
Our government does not set out to protect individuals from their own stupidity. Rather tries to ensure that the entire country is protected. Note, when the Nasdaq bubble popped, the recession was very mild. Some individuals were serverly hurt - most Americans were not overly damaged.
Posted by: schunder | Feb 2, 2007 7:39:31 AM
Schunder,
Your original post sure sounds to me like you're saying "This time is different...". The only thing that the governement has learned to do better is to make sure we suck the life out of developing nations in a more orderly way, rather than in wild swings. All the while, the national debt balloons...We're living on borrowed time buddy, how long can it last? Who knows...maybe another 50 years? The US really doesn't have any worthy competition when it comes to the size of it's economy. Not now. When and if the EU gets their shit together, or when China finally gets to be a decent size...what will happen?
Posted by: garyt | Feb 2, 2007 10:34:12 AM
