New High in the DJIA?

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A New High in the DJIA? 


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The chart above shows the weekly close of the Dow Jones Industrials Average, converted to Swiss Francs (CHF). There were several Dow Averages in the early period, and we have used an extended history for this chart.

While there is much celebration over the new high close for the DJIA this week (10/6/06, as I type), the chart above does not give investors much cause to celebrate. 

John Carder, CMT
October 6, 2006



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The chart above shows the daily close of the Dow Jones Industrials Average, converted to Swiss Francs (CHF), drawn through Friday, October 6, 2006. As you can see, while the DJIA (in Swiss Francs) has retraced a bit over half of the 2000-03 decline, it has not yet retraced the decline. It has not retraced even two-thirds of the decline. In fact, it has not even retraced 61.8% of the decline (the standard Fibonacci retracement). 

The magnitude of the retracement is not the issue. The fact that it still has a long way to go to recover the prior losses is important. The US Dollar has become a rubber yardstick. When you shrink the yardstick, everything gets bigger. 

The question is whether the DJIA today is worth as much as it was at its high in 2000. 
This chart demonstrates that an investment in the DJIA at the 2000 high won't even buy two-thirds as many Swiss Francs today (ignoring dividends), as it did at the 2000 high.

The Swiss Franc is not a perfect yardstick. It is a relatively stable currency, but it has experienced inflation and loss of purchasing power, as well. It just hasn't lost as much purchasing power as the US Dollar has. The fact that the US Dollar has lost so much value, so quickly, for so long, is a very sad commentary on our government's policies over the decades. 

Is it a mirage?
So, is the new high in the DJIA real, or is it a mirage? Measured in US$ it is real. The question is whether using the US$ as a yardstick is reasonable, or deceptive. 

I would argue that the US$ is a deceptive yardstick. Look at the first chart, the long-term one. From 1966 to 1978, the DJIA lost almost three quarters of its value (measured in Swiss Francs). During the same period, it only dropped 18.5% in US$ (from 989.03 to 806.05). Even the much-maligned CPI indicates that the purchasing power of the US$ fell by over 50% during that period. The 72% drop in the DJIA in Swiss Francs looks more real to me, but that's a choice that's in the eye of the beholder. I know almost everything that I bought cost a lot more in 1978 than it did in 1966, except for US stocks. 

The point of this study isn't to be "right". It is to show the new highs in the DJIA from a different perspective. Investors decisions will either push the DJIA in US$ down or the DJIA in Swiss Francs up. The market is always right. This chart is intended to show how much the collapse of the US$ has affected the rise in the DJIA (measured in US$). 

John Carder, CMT
October 9, 2006


Dividends are important! Unfortunately, the DJIA hasn't been paying a lot of dividends. It yielded 1.53% in March 2000. That rose to peak at 2.56% in June & September 2005 (quarterly). It is currently 2.29%. 

Has the world changed?
Perhaps. From 1902 through April 8th 1993, there were 4,743 weeks in which the DJIA traded (closed for 19 weeks in 1914 and one week in 1933). Of those, only 84 weeks had a DJIA yield of less than 3%. In other words, they occurred less than 1.8% of the time. 

From April 16th 1993 to present, the DJIA has NEVER yielded 3% or more. That's a drastic difference in behavior. Low dividend yield (less than 3%) used to occur very rarely. Since 1993, it has become the norm.

The bulls argue that the world has changed, and that dividend yield is no longer important. The bears say that stocks have been grossly overvalued for thirteen years. The market will tell us whether the bulls or bears are right. So far, the bulls have been winning this argument. 


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Last modified: October 11, 2006