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Dow Jones ready to crash?

  1. Mar 11, 2015 #1
    95o136.jpg

    Let's think about this for a moment. The Dow has more than doubled over the past 5-6 years. If that were indicative of real economic growth, then it would mean that U.S. productive output has more than doubled over that time.

    Does anyone really believe we're producing over twice as much as we were in 2009-2010? What are we producing? Tech companies valued at tens of billions of dollars but bringing in zero revenue?

    Short the Dow and use your credit to invest in precious metals. Or don't. I'll bump this thread when I'm a rich man.
     
  2. jcsd
  3. Mar 11, 2015 #2

    russ_watters

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    Well, yes: that's not what the Dow is - it isn't a direct reflection of economic growth, it is something better. The Dow is comprised of "blue chip" stocks. Proven winners - and proven winners outperform the economy. That's why over its history, the stock market has averaged something like 8% annual growth while the economy averages around 3%.

    While we're probably due for a correction or bear market in the next few years, predicting exactly when that will happen is difficult and being wrong by a year in either direction on the start or finish typically costs you more than you would have saved if you got out at exactly the right time and back in at exactly the right time.
    Good lord, no. About the only time when precious metals are a good investment are for a very short time right before and then during a market correction. As you can see, it doesn't really follow any identifiable pattern and doesn't generally appreciate over the long-term, just in short-term and temporary spikes:

    gold_real_value_2.png

    Gold had approximately 10 years of consecutive rises from 2000 to 2011, but that has never happened, at least as far back as 1900. That was probably just a biproduct of the a general commodities boom tied to oil price speculation. Sorry my graph isn't the most up to date (I wanted one that went far back), but it is currently 36% below that high -- right back at its 115 year historical average.

    In general, the only people who should "invest" in gold for the long-term are the filthy rich, who can afford to waste a little growth on a Next Great Depression hedge.
     
  4. Mar 11, 2015 #3
    I hope it can continue, I just rolled over my IRA into stocks! Then again I have 30 years, so I'd love to get in low again :D
     
  5. Mar 11, 2015 #4

    Bystander

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  6. Mar 12, 2015 #5

    russ_watters

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    I'm not in favor of the recent swapping-in of Apple. IMO, it is too volatile of a company; too dependent on fads/style.
     
  7. Mar 12, 2015 #6

    Bystander

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    Dow can be "blue chip," or it can be "tech-savvy." It'll never be both, and chasing the NASDAQ "churn" game is a big mistake, but we know how much my view counts on Wall Street.
     
  8. Mar 12, 2015 #7

    Vanadium 50

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    Well, Apple is replacing AT&T, so it's not like it's completely going tech-nutty. That said, I find the S&P 500 to be a much better metric than the Dow. And they still have Verizon.

    Going back to the OP's original claim, the stock market is not supposed to, even in principle, represent "real economic growth". I would be very wary of investment advice from someone who thought that. It's intrinsic valuation is driven not by corporate production, but by corporate profits - production less expenses and taxes. As an investment, it's valuation is also determined by its favorability compared to other investments. One reason for this long bull market is the absence of alternatives. Bond interest is low, except for the very riskiest.

    As far as the theory that precious metals represent intrinsic value, that theory predicts that the ratio of the gold to silver price is constant with time. I would encourage people to take a look at that plot and determine whether they think this theory is any good based on that.
     
  9. Mar 12, 2015 #8
    Anyway it will get up and crash again and so on forever. Cycle of money, market and life.
     
  10. Mar 12, 2015 #9

    jtbell

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    Compare the Dow with the Vanguard Total Stock Market ETF (VTI) over the last ten years.

    Dow: up about 65%
    VTI: up about 82%

    I get similar results for the last five years.

    (Be careful reading the charts! The % value in large font at the top is the gain since the market opened today; look in the upper left corner of the chart box for the 10-year gain.)
     
    Last edited: Mar 12, 2015
  11. Mar 12, 2015 #10
    Aside from the other problems that others have mentioned, do you also believe that from October 1 2007 to February 1 2009 that production fell almost 50%? That how much the stock market fell during that time, but that's not how much productivity fell.
    http://www.statista.com/statistics/...product-gdp-growth-rate-in-the-united-states/
    Here they have GDP growth for 2008 at -.29% and 2009 at -2.78%, and completely regaining all lost ground by the end of 2011. The point I'm getting at is you are trying to compare from a point that is obviously too low. At the height of the recession companies were oversold because there was fear of bankruptcy for many companies.

    You should really try and compare heights of business cycles to heights and lows to lows.
     
  12. Mar 13, 2015 #11
    It's also important to note that the Fed's QE program was literally meant to push people from keeping their money in low yield savings accounts into equities which is what has driven up American stock prices in general over the past few years. Nothing particular about the DJIA itself led to this.

    However, your comment about the tech bubbles is interesting. I really do doubt that snapchat should be valued at $15billion or whatever ridiculous valuation the Alibaba deal gave it.

    Maybe gold isn't such a bad idea right now after all.
     
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