DJIA: 11723 or Bust

August 3, 2011

A bull market in the DOW that began from a base of 777 on August 12, 1982 culminated on January 14, 2000 when the market closed at 11723.  Although those 17+ years encompassed the 22.6% crash on October 19, 1987, identical 16.9% per annum rates of appreciation occurred from the close of 1739 on the day of the crash and from the 777 close on August 12, 1982.  Besides, the DOW’s level following the 1987 crash never approached its low in 1982.  For all practical purposes, the period from August 1982 to January 2000 constituted one very prolonged bull market, not two.  And the end-point of 11723 now serves as a major measuring stick for all subsequent movement on share prices.

Today could be the day we close below 11723.  The market already made one run at that barrier, finding support at 11725.  At 11723 or lower, it’s fair to say that no net improvement of share prices has occurred in 11-1/2 years, a period that for most investors fits the label of “long run.”  To be sure, the DOW closed as high as 14165 on October 9, 2007 and at 12811 on April 29, 2011.  But subsequent declines below the end-point of the 1982-2000 bull run negate the notion that the market has managed any real improvement since its salad days. 

To consider the climbs to 14165 and 12811 as true bull markets would be akin to attaching similar importance to the three ultimately unsuccessful early attempts of the DOW to establish a permanent beachhead about 1000.  The index rose from 631 in May 1970 to 1052 in January 1973, from 578 in December 1974 to 1015 in September 1976 and from 742 in February 1978 to 1024 in April 1981.  But when the aforementioned genuine bull run started in August 1982, the DOW stood at 777, just 5.7% higher than its close of 735 some 20.5 years earlier on December 13, 1961.  That 5.7% rise amounted to a net gain of 0.3% per annum over a two-decade long span.

If today closes at a lower level than yesterday, the DOW will have dropped over nine consecutive sessions, matching the longest losing streak since a similar run of bad karma from February 8, 1978 to February 22, 1978.  Back then, the dollar was getting hammered, and U.S. consumer price inflation was at 6.4%, with core at 6.2%.

Although inflation and long term interest rates are currently subdued compared to the late 1970s, precious metal prices have been the asset to hold while share prices were see-sawing to nowhere.  The yellow metal was fixed in London on January 14, 2000 at $283.30, a level from which it has advanced by 16.6% per annum over the ensuing 11.5 years.

Things could have been worse or might yet become so.  Japan’s Nikkei had a closing quote in 1989 of 38916 and is at 9637 just over 21.5 years later.  That’s a 6.3% annualized rate of wealth destruction lasting for a generation.  Japan’s abysmal stock market performance has been associated with real GDP growth of 0.8% during the twenty years between 1Q91 and 1Q11.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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