Tuesday, October 21, 2008

Stock Market Milestones: Dow 10,000

After the Deluge

Many people worry that this will be one of those periods when the stock market doesn't advance for many years. In the middle of a worldwide global panic which included a record-setting down week -- exceeding even the Depression years and the crash of 1987 -- that's not a farfetched concern.

Many people still active in the stock market remember the 16-year period from 1966, when the Dow reached 1,000, and then remained below that level until the recession of 1982 ended. If that dismal history to repeats, at least we've covered a lot of that ground already. The Dow reached 9,200 on May 13, 1998 and is at that level as I write on Oct. 21,2008. For more than ten years, the Dow has gone nowhere. Of course, a year ago, on October 9, 2007 the Dow set an all-time record of 14,164.53.

What will determine the stock market's future is what happens to the global economy. Considerable damage has been done over the last year and danger signs are still flashing. Most observers expect a global recession that could be quite severe.

For a stock market that has dropped 5,000 points in a year, discounting a lot of trouble, the most relevant question might be what comes after that? Even assuming a recession, the stock market may already have discounted much of the damage. But afterwards, will the economy recover or remain in the doldrums for a prolonged period?

Under all but the most gloomy scenarios, the market should start to make a significant recovery in the next year or two if not sooner. Anything more protracted would rival the stagnation during the Depression or that of the 1970s stagflation for the longest period where the stock market made no progress. While possible, that is close to a worst case scenario. With proactive monetary and fiscal policies, we can hope that the worst will be avoided.