I'm no economist, but here's what I see. When Reagan left office, the DJIA was roughly 2,000. In 1992, when Bush I left office, it was at around 3,000. During the Clinton years, the DJIA went from 3,000 to 11,400.
This chart isn't perfect, but all the ones I found on the web scaled so that the increase doesn't look as significant:
At the end of Reagan's term, the DJIA was actually around 2K. Since 1929 through the Kennedy-Johnson years, the Dow stayed below 1000. How did it nearly quadruple during the Clinton years, from 3K to 11.5K? It seems to me that this would be the primary period of "funny money." I do understand that the market opened more to small investors with the use of retirement accounts and mutual funds, but I think there's something else going on, also. I'd be interested in other Freepers takes on this.
"I do understand that the market opened more to small investors with the use of retirement accounts and mutual funds, but I think there's something else going on, also. I'd be interested in other Freepers takes on this." -------------------------------------------
Heck, I don't know; Back in 86 when I was a lot smarter than I am now (I even wrote, co-produced and co-hosted a weekly business show for a regional CBS affiliate), I was preaching that the stock market was too high way back then.
It has bothered me every since then that I was so wrong in my analysis.
But maybe I wasn't wrong; I was just ahead of my time, and recognized the underlying problems; it was just that'they' were just so skilled at manipulating the market that 'they' kept building a taller and taller skyscraper for 20 years while the entire foundation rotted.
A solid leap in the Dow should have been seen after the rise of retirement investing, as companies shifted their retirement plans from defined payment pensions to defined contributions to 401(k)s. There are still many boomers who have defined payment pensions.
This trend is still on-going. Until all the boomers retire, I think we will continue to see a greater percentage of the workforce having to sock away money in equities for retirement.
I think that explains some of the leap shown on your chart, but only some. I think some of it is also funny money. Call it 50-50, because I just don’t know.
I do become highly suspicious when charts blast off from historic trends. This made me tell a lot of people to get out of the NASDAQ in 1998. I was two years early, but the charts showed tons of funny money, and scared the heck out of me. I was right, but I was just 2 years early. Of course, by the time the market plunged catastrophically, friends were all saying I had been crying wolf so long, well call it the old “a stopped clock is right twice a day” attitude.
I was right, I just had bad timing.
The charts looked much the same for median home values during the housing bubble. Again, it was funny money.
Yes, the S&P still has some funny money in it, but I think it is basically sound and nothing at all like the tech bubble NASDAQ or the housing bubble.
But I agree with you in principal. Charts that show a blast off from historical norms make no sense to me. I would ignore the DJIA trends before Reagan, as they don’t capture the new trend of workers to have to invest in the stock market in IRAs and 401(k)s. But the recent surge in stocks is “funny money to me.”
I honestly believe the S&P should be at about 900 today. Project the line from 1986 to 1995 and you get about 850-900 for the S&P. I personally believe everything above that level is “funny money”.
The trend line from ‘86 to ‘95 reflects increased investment from workers without defined pensions. The blast off surge in the S&P from 1995 to 2000 was a result of the NASDAQ bubble, IMO. When NASDAQ blew, the S&P correctly fell to 800, just about where it belonged. But we now had resistance defined at 1500, and people bought into it, so I think a lot of people simply believe the S&P should be about 1500 today. I’m not buying it. I wish that were true.
I guess we’ll see. It won’t surprise me in the least to see the S&P go down below 1000 and follow a long-term historic trend line from 1986. That’s my story and I’m sticking to it. Fortunately, most economists turn out to be wrong, so when I’m wrong on my prediction, I can at least fall back on the excuse that I am just a dumb Civil Engineer and don’t know a thing about formal economics.
Just my 2 cents. I think the S&P went over 1000 on funny money and is heading back to 1000. Time will tell.