What the Dow Can Tell Us About Past and Present Markets

DJIA Research

A review of Dow history should provide some interesting insights as well as provoke new thoughts about the markets. Let's start with the below table.

Inception: The Dow Jones Industrial Average opened at 40.94 on May 26, 1896.


(Sources: Data360; Wikipedia; Yahoo! Finance; Bloomberg)

Observations
 

• The Dow opened at 40.94 in 1896, and it took more than 58 years for a tenfold advance. Then, from Dow 400, it took another 40 years to complete a similar move, reaching 4,000 in 1995.
  
  
• The Dow left the 100 level behind for good in 1942; it grew tenfold to 1,000 in just over 30 years. Then, the Dow accelerated, as it took less than 17 years to go from 1,000 to 10,000.
  
  
• In each of the above illustrations, the Dow decreased the time it took to make the same percentage move.
  
  
• Not all milestones are equal. The Dow appears much more attracted to certain psychological levels (i.e. 100, 1,000 and 10,000). While it seems to race to these important levels, the Dow has a much more difficult time leaving them behind. It’s as if they're powerful magnets.
  
  
• After first reaching 100 in 1906, the Dow wouldn’t leave that level for good until 1942 -- 36 years later! While considerably less time, it still took nearly 10 years for the Dow to conquer the 1,000 level for good. As for Dow 10,000, it was only last month that the Dow crossed that mark again -- almost 11 years since the first time it reached that level.
  
  
• Contrast that with the index’s behavior at Dow 400 and Dow 4,000. In both cases, the index blew through these levels with ease, leaving them behind for good within a month of having reached them.

Why does this matter?

If it's concluded that 10,000 is indeed a very meaningful level and the market has displayed a propensity to linger at such levels, then I must focus my research efforts on determining when the index has in fact departed 10,000, or when it will. Would your investment strategy not be different if you knew that the Dow was at 10,000 for the last time last month rather than it being likely to spend another two or 10 years at this level? So, I conduct this type of research to inform investment strategies and manage risk.

Next, let's explore the Dow’s secular bear markets for additional clues about the market’s behavior.

Secular bull and bear markets since the Dow’s inception:



Observations
 

• The longest bull market (1896-1929) was followed by the longest bear market (1929-1949). In this case, 33 years of pleasure was followed by 20 years of pain.
  
  
• The next bull market lasted half as long as the first, but the bear market that followed was only 25% shorter than the previous.
  
  
• The third, and most recent bull market, lasted 18 years -- slightly longer than the prior bull phase. Therefore, we cannot conclude that the cycles are getting shorter.
  
  
• So, what should be the expected duration of the current bear market? Data from the past suggests bear markets can last 15 to 20 years.

I’ll have to dig a little deeper for more clues.

Bear market lows



Observations
 

• I'm less interested in when the bear will end; I want to know when we’re leaving Dow 10,000 behind because there’s a lot of money to be made on the way back up and out of this bear market.
  
  
• Maybe the bear market low provides some clue. In the first bear market, the low occurred almost three years into the bear market. It took another 10 years before the milestone of 100 was finally left behind.
  
  
• The low occurred later in the second bear market -- it was a full seven years in. Still, it took the Dow eight years to leave behind the 1,000 level.
  
  
• In March 2009, the Dow put in a low for the present bear market -- erasing more than 12 years of market gains and coming nine years into the bear market.

What we know is that in the 20-year bear market, it was 10 years after the low that the milestone level was finally conquered. In the 15-year bear market, the Dow pulled away from the key level eight years after putting in a low. Based on this, would it be fair to suggest that in a 10-year bear market like we have today, it would take five years from the low to finally leave the 10,000 level? If so, that translates to early 2014.