Blogtrek

Stocks going down even more

For a long time we have had prosperity and upward-rising stock prices. The Dow Jones, Nasdaq, and Standard and Poor stock averages were going up by 20% a year or more during the 1990s. Many stock analysts thought this was a bubble - a temporary inflation in value that eventually punctures like a balloon and falls back to normal long term trends. The bubble was caused by hypered-up dot-comism and to a lesser, but still significant extent, by cheap oil and gasoline. It seemed that everything was going on the Internet with dot-com and computer technology companies popping up all over the place. The people in the Internet-site industry were trying to convince us that they got some great products that will cause us to enjoy unbridled prosperity. And so we went along with this, investing in Quixtar and in stocks of all types, and unusually large growth rates occurred.

Some people were predicting that this trend would continue to go on, even into the zero-zero decade, as the baby boomers still continue to be active in the workplace and continue to push up the value of stocks. Some said this would continue even into the 20 teens, as with Schwarz and Leyden in their "Long Boom". Others, such as Harry Dent, said a crash was coming at the end of the decade and a long decline was going to occur, caused by retired baby boomers dragging the economy.

So I expected stocks would continue to go up into the 21st Century. They didn't. They hit a peak in early 2000, then have declined ever since. I did a little analysis recently and believe I have found out what is happening. The Big Dot-Com Lie was revealed, the bubble burst, and down went Enron, WorldCom and others. I feel we are headed back to long-term trends. But what are they?

I created a chart based on Dow Jones data. I fitted a least-squares exponential curve to the Dow Jones average all the way back to 1910. This shows an annual growth rate of 5.1% and is indicated in the magenta line. The actual average is in dark blue, and you can notice how all of a sudden the average leaves the long-term and starts heading for the sky. It is now headed back down. The yellow line is a least-squares exponential curve drawn since early 2000, when the Dow was around 11700. Notice that it continues to go down until late 2007, when it intersects the long term trend. The dot-com bubble burst is only half over. The remaining half has yet to play itself out. The Dow Jones average should be down to about 6500 or so in late 2007, after which it should follow the red 5.1% long term line and start to go up again, if other things don't occur, such as the running out of cheap oil.

I don't think this will be a steady decrease. A war in Iraq is likely, and the most likely (I hope!) outcome is a quick defeat of Saddam and an establishment of an interim government. If this happens, a gusher of oil will flood the developed world and cause prosperity to come back. So I expect a smaller bubble will occur, and the Dow will increase slightly in the next few years, to about 9000. After about two years, a crash or big decline will occur and the Dow will be at 6500 or so in 2007.

I don't think this is a good time to invest in stocks, however, since there is too much uncertainty in this forecast. The long term trend is downward until 2007, and this increase that I foresee may not come about. I say invest in bonds, money market funds or certificates of deposit, and pay off any debts, if you can. This decade should have been boom times with a 5-10% increase every year, but the Great Dot-Com Bubble ate all that up. After the long term comes back in 2007, we have the Fourth Turning coming so that I don't expect stocks will be a good investment for at least a decade or two.