Can someone explain this chart to me?
 

My question is this: What happened during the Reagan administration (and subsequent administrations) that would justify the dramatic uptick in the Dow starting in the early 80's?

I don't know why, but this chart scares the crap outta me.

http://static.incrediblecharts.com/t...1223_dji_m.png

I'm just guessing, globalization. I'm guessing that computers and the Internet created a global phenomenon.

But, I pulled that outta my butt, so who knows.

Hey twenty years as a professional derivatives trader here... its simple


More buyers then sellers. Its a supply and demand thing.

Interesting question.

Trader's demand reasoning makes a lot of sense to me as it's also when IRA's (mid 70's) and 401k (mid 80's) where introduced and became popular to the masses. The baby boomer generation started to save for retirement in bulk.

http://forums.pelicanparts.com/uploa...1318362122.jpg

Maybe it's this ! :D

LOLOL, so true.

Al Gore invented the internet.

I gave you the abridged version

But.....but.....aren't all those buyers going to need to sell in the coming few decades to pay for their retirement? And (follow my caveman logic here), if their less successful children are unable to save and invest at a rate that matches the rate of the sell off, doesn't that mean that we are royally screwed in the long run? I'm just thinking out loud over here.....

But they say the universe is still expanding, so why wouldn't the economy? Seems that when it comes to Wall Street, you are only to look as far as the next quarter. The next generation, thats like 80 or 90 quarters away.

Take a good look at when they started the 401(k) program.

People started putting away a portion of their salary as a retirement program in the early 80's, and it usually ends up being invested in the stock market through mutual funds etc.
The more we save, the more we invest, the more the price of stocks goes up.
That results in a buttload of money being put into the market. In other words, we are investing in our own country.

edit: aw crap, Vincent beat me to it.

I've been trading the markets for over 25 years and I'm still cornfused! The only way I've made any money this year is trading options!

Also, in the mid 80's, full service brokers started offering discount broker services for the 'common' man and next in line was internet broker services and everyone jumped on the band wagon. Olde Discount (yeah right) was charging 100 bucks per trade and in short order, went by the wayside. Forgot who bought them out. Ameritrade bought out Daytech in the late 80's iirc. BrownCo got absorbed by Etrade and the list goes on. It wasn't long before they were competing like crazy and slashing prices and everyone was looking for an easy way to make a buck and many did but many lost their asses even in an up market. Imo, the chart is the result of a feeding frenzy. Anyone remember when yahoo was over 250 bucks a share?? WTH was up with that!? Feeding frenzy....

I'm not saying were doomed. I'm simply trying to understand how the overall value of the stock market expanded 11 fold in 30 years, when it had taken 76 years to get to 1000.

I think HD makes an excellent point in post #9 above. It seems a given that that will happen. It's curious that the alarm bells remain largely silent about the parallels between now and 1929. In this area, the reality of bread lines is just around the corner. Many social-services agencies that provide direct service to the poor are closing their doors because of a huge reduction in funding and donations/ contributions over the last 3 years. And it's getting worse.

Law enforcement seems to be a growth industry, however.

Its the DOW, try to find the same chart for the NYSE during that period - it won't look like that is my guess. Even the NASDAQ or the S&P will look different. The DOW is one of the worst indicators.

Market went nowhere for a decade in late 1960s and 1970s. High inflation -> high interest rates -> low stock valuations.

Then inflation was whipped. Volcker Fed, end of OPEC oil embargo, end of Vietnam war, etc. Interest rates went on a multi-decade decline.

I once spent a fair bit of time doing regressions on every factor I could think of, vs SP500 P/E. The most explanatory factors, other than the previous year's P/E, were CPI inflation and interest rates. EPS growth, revenue growth, GDP growth, etc were all far less explanatory.

Other reasons too. Technology sector took off. Financial system innovations. Long decline in savings rate. Increase in debt leverage.

We've been in another going nowhere market since 2000, over a decade now. At some point that stagnant trend will break. Kind of like it did starting in 1980s.

Scary chart? Try inflation adjusting the increase over 35 years. The real return will look more reasonable.

I recall flipping through a book called "Dow 3000" while in my MBA program around Fall of 1987. It predicted a sharp rise in the Dow, which was much lower than 3000 at the time. I believe it did look at the cheapening of money, like Sammy mentions.

If the stock market were an engine, and if money were the intake air, then monetary policy bolted a turbocharger on and that brings us to today. The engine threw a rod about three years ago.

Yeah. Inflation.

How much was a new Porsche 911 in 1980? How much is a new Porsche 911 now?

While not directly attributable to this chart, bubbles are generally externally caused. It can be driven, like the housing market, by playing with the interest rates so that even with the increase in prices they are still affordable. Or it can be pent up demand, like consumer spending after WWII or the Power Generation market in the late 1990's once the EPA regulations were set.

We're going to see another surge like the 1980s/1990s, once the rules are set and it doesn't look like someone will be mucking with them.

Inflation adjusted:

http://forums.pelicanparts.com/uploa...1318427752.jpg

Is that really an apples to apples comparison? What did you get on a 1980 911 compared to what you get today? Today's cars are loaded with high tech emissions, safety and more creature comforts than ever which only adds to the price of the car....and they have more power too?

SP500 P/E (on 2011E) is 12.3X.

Build yourself a simple DCF model for SP500. Assume earnings = free cash flow, which is a reasonable simplification over time. 10 year yield is 2.2%, use a simple discount rate of 2.2% + equity risk premium. To simplify again, assume earnings growth for the terminal period is zero. So we only have two variables: equity risk premium and earnings growth for the forecast period (10 years).

See what you have to do to those variables to get a 12.3X.

Here is one way to get there: ERP +5% (roughly the historical mean), forecast growth -3%. Another way is forecast growth
+2% and ERP +7.5%. Do those sound reasonable?

Does the longer term chart clarify? Look at the recent bull run (1980-2000), compare to prior bull runs. Look at the current stagnation (2000-), compare to prior stagnations. Better to look at real (inflation-adjusted). Better yet to look at a broader index, SP500 or Wilshire 5000.

The other real issue with this graph is that it's a version of the "Oh boy" curve. That's where the graph makes something look worse than it is because the perspective is skewed by the way the data is presented.

When the DOW is 10,000 and it moves 1,000 points, it moves only 10%. In the 50s when it was 1,000, 10% was 100 points. So the increase between 1980 and 2000 is magnified compared to the same percentage changes earlier that involved smaller absolute numbers.

The market did increase by a factor of 10 between 1980 and 2000, but increased by a factor of 10 between 1945 and 1965 too. In real terms it sank perhaps 25% between 1965 and 1980, so the run up after 1980 was partial inflationary, partially catch up, and partially an increase on a larger base, which makes the swing look magnified on a chart like this.

The economy is probably a hundred times bigger now than in the 60s, access to the markets is many times what it was. The trend chart does not predict disaster.

Well, the concept was that the economy would continue to grow if we could just continue to expand at a 3% growth rate, and continue to consume energy at a 3% increase as well. Ever wonder why we went to Iraq ? It is all part of the New American Century, something you may have heard Mitt Romney mention in the last few days.

Question is, how long can we continue to consume at ever increasing levels ?

http://upload.wikimedia.org/wikipedia/commons/3/3b/USDebt.png

This chart seems to explain it. It won't upload for some reason.