What a 100-Year Stock Market Chart Says

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Up on my office wall just beyond my computer screen I have a 100- year chart of the stock market. It’s none too elegant, having been cobbled together from a long-term chart of the Dow that Value Line offers for free on its website, some decades from other data sources and crude penciling in by me of missing months. (A friendly source once sent me the full hundred years of market data but it crashed our graphics editor’s computer.) My chart is not an exact replication of the Dow’s every twitch—heck, it’s not even up to date— but it does show the general trend. Most valuable to me, it offers a rare perspective on America’s progress and the market’s reflection of that. In that sense, it’s very efficient.

As I look at the chart it’s plainly obvious that the 1920s and 30’s were an unusual event, a blowout party followed by a horrible hangover. But after things get back to normal the stock market begins a long prosperous journey, as did the country, rising pretty steadily until the mid Sixties. The market gets a bit funky at that point and pretty soon the combined costs of Vietnam and LBJ’s Great Society initiatives begin to weigh heavily on stocks, as do civil unrest and the big inflationary squeeze from OPEC. It was a rough time for America and the Dow reflected that—it went nowhere over that long stretch of almost two decades (adjusted for inflation its performance was far, far worse.)
Then came the big market rise of the 1980s, powered by Reagan’s magic and a huge drop in inflation and interest rates. Interestingly, on a long-term chart the big 1987 stock market crash seems but a stumble. The business and investment community got carried away by junk bonds, hostile takeovers and a bit of shady dealing (ah, good ol’ Drexel Burnham) and the stock market did a shockingly quick realignment.  The market drop was quickly shaken off, though,  as nerdy entrepreneurs like Bill Gates and Steve Jobs came into their own. America flexed its new tech muscles, the Cold War ended and soon the U.S. Government was in the black. Reflecting all that,  the stock market rose mightily. In the course of that tech rise, speculative excesses grew until the stock market had another blowout that started in 2000. The Dow fell from more than 11,000 to just 7,286 in late 2002. We recovered and moved to a new high by late 2007, but it was on funny money:  the inflated value of homes, maxed-out credit cards, and Liar, Liar Pants-On Fire mortgages that were bundled into, well, you know. What a mess! Down went the Dow along with all the other stock market indexes, hitting a low of 6657 in March of 2009. It  has since come back remarkably well, rising more than 70% to about 11,000.

So what is the big 100-year chart saying about the present?  If my eyes don’t deceive me there’s an almost completed Head-And-Shoulders formation taking shape. That’s technical talk for a broadly distributed market top: Stocks formed a peak in 2001 (let’s call it the Left Shoulder), a higher peak in 2007 (Let’s call it the Head) and now we are rising back to that 2001 peak (This would be the Right Shoulder). What follows the right shoulder is the new market direction, i.e., down. More directly, if we Americans don’t get our act together soon we could be in for a very long bad stretch for stocks.

There’s no specific prescription for fixing the economy and turning that Right Shoulder into the base for a new bull run, but here’s what would help: A wind down or end to double wars, a big money reform of entitlements like Medicare and Medicaid, more realistic spending by states and cities on things like benefits, modernization of the country’s infrastructure and tax rates that encourage risk taking and innovation. Right now, we have the low tax rates (so low, in fact, that they could even drift up a bit and we’d still be okay) but none of the other necessary ingredients. As the long-term chart suggests, there’s a big payoff if we get it right and a big cost if we don’t. By the way, the other cool thing about this chart is that it doesn’t know from Democrats, Republicans or Tea Party media events, only about the health and competitiveness of the U.S. economy. Here’s a snapshot: