Here is an interesting chart from Deutsche Bank’s Jim Reid:
It shows the inflation-adjusted level of the Dow (in today’s money) back to 1900, together with two trend lines – one for the whole period and another based on trend in place from 1900 for 1994.
As you can see it was around the mid 90’s (around the time of Alan Greenspan’s famous ‘Irrational Exuberance’ speech, in fact) that the Dow started to de-couple from its lon- term trend.
And what interests Reid is whether that de-coupling can be rationally explained.
If you are a market historian, you have to decide whether the 1900 – end 1994 best fit line was vaguely the correct basis for a long-term trend of equity prices or whether you believe something changed fundamentally in the mid-1990s in a positive manner (earnings?, the economy?, EM?) that permanently elevated the price level of Western equity markets. If you don’t believe that anything really changed from the mid-1990s (maybe only debt levels?) then the Dow at 10,000 still historically looks a bit stretched 11 years after it first passed through this level. This point is not specific to the Dow, its equally applicable across most Western equity markets. We only use the Dow due to the latest move through an important psychological landmark.
And here are some further sobering observations. (Emphasis ours).
What we would say is that after the 1929 crash, markets took until 1954 to get back to their pre-crash levels. Also after the 1966 peak (Dow 995 in Feb 1966), the Dow only permanently crossed 1000 for the last time on 17th December 1982. So the market hovered around 1000 for nearly 17 years. This is stunning given its a period in which the price level (as determined by CPI) tripled in the US. Given that Western equity markets were approaching their most overvalued point in history when the Dow first traded through 10,000, one would have to bet against history to suggest that we can permanently leave current levels behind anytime soon. Interestingly in a high inflation world the Dow crossed 900 97 times between 1965 and 1982, and crossed 1000 65 times between 1972 and 1982. Since 1999 we haven’t had inflation to ease the adjustment as the overall CPI price level is only a third higher.
What we would stress is that such a sweeping look at markets is completely irrelevant to the short to medium-term view. The markets could increase 50% over 0-3 years and these longer-term trends could still eventually dominate. So we are merely pointing out the historical long-term precedents for market peaks to take many, many years to finally be left behind.
A cyclical bull market in a structural bear market, then?