Dow Jones: Apocalyptic or Not?

The Dow Jones Industrial Average, arguably the most well-known index of Wall Street’s value, has been on pretty much everyone’s’ mind lately. I’ve watched with mixed emotions as it has sunk with no signs of rebound. We hear about how much ‘wealth’ has evaporated, and it seems our collective mood is incredibly sour. I have to admit that I’ve been thinking quite a bit about this, both because I live and work in New York City—where the jobs market is probably more tied to Wall Street than any place, and because of my interest in what this has done to the political landscape in the eleventh hour of election season.
I have one other perspective that I would like to share: that of a mathematician. And using my mathematician’s careful eye I see a way in which this is both deeply troubling and surprisingly calming. For the sake of dramatic tension, let’s start with the bad news.

The Dow Jones Average, as of the close on Friday, was 8378 points. A pretty far drop. And if you look at a historic graph of the DJI (Dow Jones Index) you will see that it first climbed to that level somewhere around 1997. So one could argue that we’ve slashed all the value that we’ve earned over the last 11 years. Depressed? Wait, it gets worse! Yesterday I realized that I hadn’t considered inflation in my historic comparison! If I include inflation (the fact that today’s dollars don’t buy as much as yesterday’s money did) I have to slash another 25% (approximately) from that calculation. Hence, our Dow Jones Average of 8378 points becomes closer to 6283!!

Okay, before you start hyperventilating let me give you the good news. If we’re going to look at numbers, let’s look at a graph of the Dow Jones. Below we have the DJI since 1980.

DJI since 1980

DJI since 1980

I added the red line, and I used the DJI value from 1985 to 1995 as a baseline. If you consider that previous decade’s growth (which I would argue was a lot more reasonable than the crazy Dot-Com-Boom years or the crazy Housing Market years) you might see that we’re now EXACTLY WHERE WE SHOULD HAVE BEEN ALL ALONG!

You know what we call that? We call it a correction. So get out of your bomb shelter bunker, put down those Valium, and get ready for a lousy recession. I’m afraid that WILL hurt, but every 8-10 years they normally happen, and we always come out of them in a newer age of prosperity.

UPDATE: See Dave’s comment below. Wow! I really should have my Mathematician’s Vulcan Ears revoked for that oversight. Here’s an updated graph (sorry, no time to add the red line, but it should be obvious) :

More accurate (and depressing) graph

More accurate (and depressing) graph

Click on the above picture for a close-up.

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One thought on “Dow Jones: Apocalyptic or Not?

  1. David

    For the sake of the market (and my investments), I’d like to agree with you outright, but there’s a serious flaw in this analysis, as I see it.

    As best I can tell from the numbering of the vertical axis, you’re using a linear vertical scale. Investments, however should be expected to grow in proportion to the invested amount. This means that either 1) your red baseline should have an exponential curve, or 2) the data on the graph should be adjusted using a logarithmic scale on the vertical. I’m afraid that if you do this adjustment, you’ll see that we are in fact in quite a bit more of a slump than you think.

    Another way of looking at this: In the 10 years from 1985 to 1995, the market prices went from about 1.7K to 4.0K. Based on this trend, we can expect a doubling every 7-8 years. Therefore, we should have had not-quite two more doublings in value since 1995. So, we should expect the market to be approaching 16K in the next two years. Unfortunately, we’re hovering at just over 50% of that.

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