Source: American Enterprise Institute
The Dow Jones Industrial Average of 30 industrial stocks was at 54.6 at the end of 1914. By the end of 2014, it was at 17,823.
But adjusted for changes in the Consumer Price Index, the gain is much more moderate—about 2.7 percent a year. The average dividend yield on DJIA stocks was about 4.1 percent. So the total average annual gain was 6.8 percent.
What the chart shows is that there have been long periods when stock prices declined or were static. You can’t count on stocks always going up. The 1920s and 1990s booms were not necessarily typical.
I’m not smart enough or stupid enough to predict how the stock market will go, but you’d have to be very optimistic to think the boom will continue.
I don’t think the recent rise in stock prices reflects the real economy. I think it is a result of the Federal Reserve Board holding down bank interest rates, so that savers are driven to buy stocks in order to get a yield on their money.
Many CEOs are buying back the companies’ stocks, thereby driving up the price, instead of investing in expanding their businesses, which would benefit the nation as a whole.
This is another example of Stein’s Law: If something cannot go on forever, someday it will stop. The recent stock price boom could not go on forever.
The stock market in 100-year perspective by Alex J. Pollock for the American Enterprise Institute.
Wall Street Panic by Mike Whitney for Counterpunch.
Quick Thoughts on the Stock Market and the Economy by Dean Baker for Beat the Press.
Smoke and Mirrors of Corporate Buybacks Behind the Market Crash, an interview of Michael Hudson for the Real News Network.
Update 8/27/2015. I made some changes in wording that didn’t change the meaning of this post.