At what level should the Dow be now?

me | fishtank

[fishtank]

The Dow fell below 7000 this week. But I was looking at the numbers, and it was standing at about 1000 points in the 1979-1981 time frame (I wanted to pick a good point to start from). Then I did a simple calculation assuming 3%, then 4% average growth rate since that time 29 years ago.

(1.03)^29 = 2.36

(1.04)^29 = 3.12

Would this make the real value of the Dow Jones to be about 2360 to 3120?

I know the future value is higher, due to market expectations, and confidence in future earnings, but when the Dow was 14,000, was that truly realistic?

Just thinking out loud here.

[erman]

have to take in inflation also..

[Minipax]

I show 3120 as well, assuming 4% annual growth.

[netmilsmom]

bttt

[nufsed]

Wherever it is that’s where it’s supposed to be.

[boxlunch]

I proposed this exact idea to my husband last fall during the first go-round of stock market crashing and burning. He didn't believe me then, but is thinking maybe I was right now!

[freedumb2003]

You fortgot to take into consideration those companies have also grown in that time. The GM of today is far larger (and thus, theoretically worth much more) than the GM of 1981. The same is true of all the components of the Dow.

Yes, there is some speculation built in — always has been and always will.

I believe you are correct in terms of the DJIA being overinflated, just not by the claculations you are using.

Sooner or later, fundamentals will kick in. A stock that falls below the very real ability to generate earnings and dividends, based on financial fundamentals, will be a bargain no matter what.

[fishtank]

Well, you already shown me that I’m not an economist....

1.06^29 = 5.42 (from 3% growth times 3% inflation: 1.03*1.03=1.06)

1.08^29 = 9.32 (from 4% growth plus 4% inflation: 1.04*1.04=1.08)

...but again, I’m no economist........

[fishtank]

I think my question is this: we’ve got too many reasons to panic, is the Dow one of them??

[Hessian]

DJIA first cracked 1000 in 1972. That would adjust for inflation to something like 5500 today.

[freedumb2003]

>>I think my question is this: we’ve got too many reasons to panic, is the Dow one of them??

That is like panicing because you (assuming you are male) you don’t understand women. All the panic in the world won’t change what it will do.

But, as I said, it will bottom out when stock prices repreent real earnings capabilities — but the speculation levels will probably never be seen again.

Just enjoy your 100.25K

[ShiftyKnuckler]

Just the basic math of 4% growth every year (not considering inflation) would look like:

1979		2,360
1980		2,454
1981		2,553
1982		2,655
1983		2,761
1984		2,871
1985		2,986
1986		3,106
1987		3,230
1988		3,359
1989		3,493
1990		3,633
1991		3,778
1992		3,930
1993		4,087
1994		4,250
1995		4,420
1996		4,597
1997		4,781
1998		4,972
1999		5,171
2000		5,378
2001		5,593
2002		5,817
2003		6,049
2004		6,291
2005		6,543
2006		6,805
2007		7,077
2008		7,360
2009		7,654
2010		7,961
2011		8,279

[fishtank]

The Dow was at 1000 in 1979, I think.

I think.

[fishtank]

I got the 1000 level from here:

http://finance.yahoo.com/echarts?s=^DJI#chart1:symbol=^dji;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

[ExSES]

What cost $1 in 1929 would cost $12.00 in 2007.

And, this is by the BLS figures (which have been "Politically Corrected" since the Clinton years.

Any calculations which ignore inflation are worthless!

[ShiftyKnuckler]

Doh!
Was working more on the formula and typed in the wrong number.

I goofed.

That would put us about 3243 for 2009 with the basic math of 4% growth every year.

[WoofDog123]

“You fortgot to take into consideration those companies have also grown in that time. The GM of today is far larger (and thus, theoretically worth much more) than the GM of 1981. The same is true of all the components of the Dow.”

The current dow, yes. Ignoring mergers (which are a legitimate issue beyond DJ’s control), they altered the index several times in the 90s. It may have been justified, but it certainly impacts comparison numbers.

[WoofDog123]

I was reading a book by someone growing up around 1900 in NYC and he discussed buying food plates/items for *pennies.*

(ref “harpo speaks”)

[Bean Counter]

Interesting question my friend, and a great way to consider our economic numbers in a more calm manner than the media often presents.

I think that you can clearly see that a 14,000 Dow in 2007 defines how big the so-called “housing bubble” grew. With people repeatedly cashing their home equity out, and spending the money on everything from breast implants to jet skis to family trips to Disneyland, the entire economy became overblown, all on borrowed money.

[Dutchboy88]

You are correct, if the Dow could be thought of as a bank account. The difficulty is, it is a composite of all kinds of companies (30) in varied industries. Those companies have gone through new issues of stock, mergers, etc. Over those years in question, some companies have been removed and others inserted. I question whether there really should be a correlation to a “growth” rate. Kind of like, the length of cars over time...longer or shorter. What does it matter other than the short run?