Wednesday, January 25, 2017

Dow Jones: finally above 20,000

Donald Trump has promised his countrymates to make America great again. Immediately after the inauguration, he began to dismantle the Obamacare, gave okay to the XL pipelines, removed the U.S. from the Pacific trade deal (whether this is helpful for the U.S. is a subtle question: China may replace the U.S. and benefit from the deal a lot), and revealed incredible plans to cut regulation by something like 75% and corporate taxes from 35% perhaps to 15%, among other things. Trump is also suspicious about the elections – millions of illegal immigrants and/or dead people could have voted, he believes (for reasons that aren't quite comprehensible to me), so he started an investigation.

There are surely many things that un-Americans like me simply have to be jealous about. I don't live in a country that seems to be on the path of removing most of regulation. The most powerful politician in the country, the billionaire and finance minister Andrej Babiš, is working hard to increase the regulation. He's added lots of new forms, mandatory gadgets to report all cash transactions, and lots of other smoking and other bans are emerging every week. And the dirty, evil, stupid rabble is applauding him.

Babiš may be exactly as wealthy as Trump and he may even be in a similar process of disentanglement from his company in order to reduce the clash of interests. But the different backgrounds of the two men just can't disappear. Trump and his ex-wife Ivana were two of the people who were carefully watched by the Czechoslovak communist secret police 30 years ago – while Babiš was one of the people working for that despicable agency.

But let's return to the American optimism. One of the characteristic time series reflecting the success of the U.S. is the Dow Jones Industrial Average of 30 top companies. So a part of the promise to "make America great again" simply has to be the work to "make Dow Jones great again".

So far, it works rather well. Before the November 2016 elections, Dow was around 18,200 which wasn't too bad because in February 2016, the index visited the realm below 16,000, too. As you can easily see, Dow has added 10% since the election. But it took quite some time. Dow has already surpassed 19,700 on December 20th and it has played with numbers around 19,990 in the following month.

At one moment, witty financial journalists wrote texts titled "Wall Street is partying like it's 19999". It's a funny coincidence because in 1999, the stock markets were doing very well and some of the Clinton bubbles were being built. And add just one digit "9" and you get a happy number right beneath 20,000 that the New York Stock Exchange flirted with on that day.

The DJIA graph surely looked like there was some repulsion from the level 20,000. It's plausible that some investors decided that 20,000 is the psychological threshold at which the stocks are overpriced and they were selling near this threshold. Maybe it was the reason why the market couldn't quite surpass this psychological level. But minutes ago, it changed and Dow has looked above 20,010, at least for a while.

It seems somewhat more likely to me that the crossing of this psychological barrier will encourage further gains. The people who think that 20,000 means "sell" have probably sold in recent minutes – or weeks. And then there are those who think that 20,000 means "buy" and those will accumulate their exposure to stocks. In this sense, the same repulsion from 20,000 that kept Dow beneath that level for a rather long time may repel the index from 20,000 while on the other side – e.g. up. Warning: This is not a promise and I give you no guarantees. ;-)

One may be afraid that a bubble is being inflated. But as I mentioned at the beginning, there are very good Trump-inspired fundamental reasons for the increase of the stocks.

This logarithmic chart starts in 1900 and shows Dow holding below 100 for decades. The increase from 100 towards 400 or so in the middle and late 1920s made sense – the index was just catching up with the growth that should have taken place between 1900 and 1920. However, this interpretation turned out to be too optimistic with the 1929 crash. You may see that the minimum of DJIA in the early 1930s was close to 50 and lower than any previous value in the 20th century.

People who bought all of their stocks in 1929 only got to their initial investment in 1954 or so. Well, it wasn't so bad because the growth from dividends is removed from the index and those beat inflation. On the other hand, those who could buy near the minimum in the early 1930s easily added an order of magnitude to their wealth in 2 decades.

The evolution of DJIA since the mid 1930s looks easy. It's almost smoothly growing exponentially – if you can afford some temporary drops by up to 20% – and DJIA adds an order of magnitude each 35 years or so. It may look incredibly fast but\[

10^{1/35} \approx 1.068

\] so the growth is just 6.8% per year, plus dividends that should get you above 10% a year.

While Dow and other U.S. indices are setting new records, not everyone is that lucky. In other words, there may be some opportunities. For example, the Prague Stock Exchange PX index is still slightly more than 50% below its record high in October 2007. You know, the maximum in October 2007 was 1908 or so while the index right now – after a very good day – at 940. The Czech economy has strengthened since 2007. It may be true that most of the strengthening took place in companies outside the PX index. But anyway, they're rather standard companies that haven't weakened too much relatively to their industries.

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