Posts Tagged ‘stock prices’

The stock market in 100-year perspective

August 26, 2015

 DowJones1914-2014-Constant-e1440525772683Source: 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.

LINKS

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.

The U.S. jobless rate is falling [Update: Maybe]

March 7, 2015

MW-DH110_jobs_r_20150306091454_ZHVia MarketWatch.

It’s interesting that the report of gains in jobs and a drop in unemployment was followed by a drop in stock prices.

Conceivably this could be been due to the improvement being less than expected, but analysts quoted in my morning newspaper said investors fear that the apparent recovery will cause the Federal Reserve Board to stop holding down interest rates in order to stimulate the economy.

A certain number of people can be expected take their money out of the stock market and put it in savings accounts in banks, or in bonds, because they would getting actual interest income again.

In other words, stock prices reflect an unsustainable government policy, and not the real health of the economy.

alternativenationalemploymentratesVia TownHall.com.

Still, it’s good news that the unemployment rate is falling, and is falling by every measure.

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Forgetful mutual fund investors perform best

September 15, 2014

c-75Proponents of Social Security privatization say that the average investor will do better investing the money that goes to Social Security taxes in the stock market.  The chart above, which is from Business Insider, shows the problem with this.

It is true enough that, over a long period of time, stock market averages, such as the Russell 2000 or the Standard & Poor’s 500, do better than Treasury bonds.  But most of us don’t do that.

We get overoptimistic when stock prices are going up and panic when stock prices are going down.  So we buy high and sell low—the opposite of what a smart investor should do.

The following is from an exchange between Barry Rithotz, a financial adviser and blogger, and James O’Shaughessy, of O’Shaughessy Asset Management, on Bloomberg Radio.

O’Shaughnessy: “Fidelity had done a study as to which accounts had done the best at Fidelity.  And what they found was…”

Ritholtz: “They were dead.”

O’Shaughnessy: “…No, that’s close though! They were the accounts of people who forgot they had an account at Fidelity.”

via Business Insider.

Ritholtz told about some of his experiences in estate planning, where a family fought over inherited assets for 10 or 20 years, didn’t touch them in the meantime and found those 10 or 20 years were the best period of performance.

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