Re: Dow 36,000
Thu, 21 Oct 1999 12:32:01 -0700

I tried to extend their chart for the next three years, 87, 88, and 89. These are S&P 500 closing prices from

1/2/86          209.57
1/2/87          246.43
1/4/88          255.94
1/3/89          275.31

1/2/96          620.73
1/2/97          737.01
1/2/98          975.04
1/4/99          1228.10

The corresponding ten year ratios are:

1986            2.96
1987            2.99
1988            3.81
1989            4.46

Unfortunately I don't know how I could get the data to calculate the 30 year average earnings of the S&P companies. However over a four year period the average shouldn't change much, so I will ignore it and estimate the X axis movement purely on the basis of the ratio between the 1986 value and the values on the following years.

Reading from the chart, the X axis value for 1986 is about 15, and scaling it upwards for the following years we get:

1986            15
1987            17.6
1988            18.3
1989            19.7

When I plot these, they make a beeline upwards to the right, ending a bit above the "e" of "Log Scale" in the heading above the chart.

This line is outside the envelope which has been explored by previous years. Visually it is very much out of place, a jarring upward lurch at right angles to the long term trend line. I'm sure that if we recalculated the regression the fit would be much worse today than it was in 1986. (It would be interesting to know if the author has revisited the issue since publication.)

It is well known that the market today has many characteristics which are not typical of how it has behaved over most of this century. By most conventional measures it has been overpriced for years. This chart illustrates the same effect. The market in the last few years seems to be defying gravity. We are literally off the chart. Whether and when we will return to earth remains to be seen.