Peaks and Valleys of the Dow

The bar graph shows the real year-end growth of the Dow Jones Industrial Average from 1915 to 2008 (green diamonds). Taking inflation into account, the blue boxes show changes in the year-end Dow Jones Industrial Average. The Average shows overall growth with several peaks and valleys. The valley after the 1928 peak was not crossed until 1954. The valley after the 1965 peak lasted until 1995. The date at which the 1999 valley will be crossed is unknown. Assuming a constant rate of growth for the Dow from 1915 to 2008, the inflation adjusted growth rate is 1.4%. This means that on average, investing in equities grows slightly faster than inflation. The time at which one lives has a big effect on what the individual investor sees. The 2008 inflation adjusted Dow Jones is equivalent to the 1996 year-end adjusted value, which means investments made in 1996 have neither increased, nor decreased in inflation-adjusted value. Had one invested in the Dow Industrial Average in 1965, those investments lost over two thirds of their value by 1981.

The real growth of the Dow Jones Industrial Average, compounding at 2 percent per year since 1915, is the green line. The growth at 10 percent from 1981 to 2000 is the red line.

What is the explanation for the change in growth rate from 1981-2001? Alan Greenspan, Federal Reserve Chairman, credited "irrational exuberance." Other factors include expenditures on the "Y2K problem," enthusiasm about the future of dot.coms, federal tax policy, baby boomers saving for retirement, the emergence of new financial and higher risk financial instruments, and economic fundamentals of increasing productivity, high employment and low inflation.

Source: The Dow Jones Averages, 1885-1985 from Dow Jones-Irwin, updated to 2008.

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