I’ve been trying to make sense of all this political turmoil, from a non-economist view point. I started looking at the Dow Jones over it’s entire history, and tried to see if statistics/charts could help try and determine the point we really should be at. Right now we are looking at the disappearance of imaginary wealth–money that was based on nothing but false expectations. I’m trying to determine where we get back to “real” wealth if there is such a thing. So here’s the graph:
If you note, there are two large changes in the slope of the graph. In the mid-to-late 80s the rate of increase changes upward quite a bit. A colleague, Tim Whibley has mentioned that this is probably because of the change in tax laws regarding mutual funds that was passed in 1986. The next big jump in the rate of increase occurs in the late 90s. Again speaking with Mr. Whibley, that spike probably occurred with the internet, electronic trading, and more public directly trading in stocks. Now did one or both of those changes start to create false–or more accurately–unsustainable wealth? Only time will tell.
I’ve added two lines to the chart that offer crude approximations of the linear rate of increase in the DJIA before the changes. The red-line before 1986, the black line before 1995. Now current conditions are saying that the late 90s increase was unsustainable, which could mean things could drop back in line to say a DJIA of 7000? Pure speculation, but isn’t speculation fun! Now on a negative note, what if pre-’86 was the real line? That line is not much more than inflation (guess), but if that line is the “more true” line, then could we see a DJIA of 2000? Not likely, but you never know.
As I stated before, I have no real answers, just looking at graphs right now. The real world is much more complex than one index. We’ll have to wait and see what really happens.