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Dow 20,000 – A Brief History of Magic Market Levels
Investors obsessively focus on round numbers for the Dow Jones Industrial Average. More than half a century ago, in late 1965, Wall Street breathlessly observed the Dow approach 1,000. In both January and February 1966, the index surpassed the magic level intraday, only to slip back by the market close. A bear market ensued, shaving a quarter off the index value, and excitement subsided.
You would think that 2016, above all other years, would have cured people of seeking predictions of the future, even leaving aside the Chicago Cubs. The United Kingdom voted to leave the European Union and Donald Trump won the presidency, neither predicted by Las Vegas betting lines, political polls or prediction futures markets. Despite having failed in every possible way they could fail during the political season, pundits now confidently predict the aftermath. New Year’s predictions abound.
Annual Chart through 2016
Below is our annual listing of different asset returns (large U.S. stocks, small U.S. stocks, foreign stocks and U.S. bonds) with a box around the best-returning asset for each of the past 51 years. The 2016 winner was small large company U.S. stocks, by far the worst of the four assets, and therefore the most in disfavor, the previous year. The ebb and flow of each asset’s returns show that good years may just be “borrowing” future returns. Just about the time you fall in love with an asset, it is about to under-perform. Everyone’s attention is on large U.S. stocks now, but they have been the best fewer times than the other three. Rather than being disappointed by the market’s inability to conform to our predictions, we act to adapt our investments to maximize the chances of achieving realistic goals.
No Country For Bold Men
In Cormac McCarthy’s novel No Country for Old Men, killer-for-hire Anton Chigurh gives some victims a chance to escape their fate by calling heads or tails on the flip of a coin. We all have made bets on the flip of a coin, so the excruciating suspense in the novel is not the result of the probabilities but from what is at stake.
Stability Creates Instability
Talk to anyone baby-boomer age or older about families and you will hear complaints about the extremes modern parents go to protect their children. Today’s toddlers will never get a bruised face from a coffee table at home, because a rubber bumper surrounds the edges.
Layers of Deception
Each significant financial market downturn reveals the excesses of the previous boom, including a number of scams and frauds. The exposure of these deceits in turn leads to the unflattering portrayals of the financial services industry in the media and further attempts to increase regulation.
Annual Chart through 2015READ MORE
Bad Breadth Always Rings Twice
It probably is not apropos of the season, but we will confess a secret: We are huge fans of film noir with its hardboiled dialog, cynical worldview, corruption and the rotten characters.
Quicksilver Messenger Service?
We live in a time of great skepticism. Surprising strength from outsiders has marked nomination races for the 2016 election in both political parties.
Late last year, our newsletter discussed a lack of logic as a markerof mature, late-stage bull markets. Market tops tend to be long, drawn-out affairs, frustrating investors trying to make sense when sense is not rewarded.