A decade of Dow

 

Call it curiosity or joblessness, today I decided to spend few hours looking at the Dow Jones Index data for the last decade. I have no stake in any US stock, but my objective here is to understand the magnitude of impact of any event on the stock market. Though doing this exercise on the Sensex would have made more sense to me, I figured that finding data and information on something that is US based is probably faster than its Indian counterpart. 🙂 

Thanks to MSN, I got the Dow Jones Industrial average data for the period Oct 1998 to Oct 2008 within seconds. I marked all the major high and low points in the graph (in blue). And a mouse over feature on MSN helped me find out the dates and correspoding closing values of the index. That data, in turn was used to create the left side of the table below the graph. 

The right side of the table shows information collected on the events that coincide with the corresponding high-low points. These events have been gathered from google searches which resulted in articles and news reports relevant to the months/indices in question.

 

 

 

The first row of the table shows an important event that is not marked in the chart. 1997 saw turbulence in the Asian market that affected the world markets. The major event was the fall of LTCM hedge fund and default by Russia which led to a major financial crisis. Prior to that the US economy, since 1992 was on a Clinton Bull Run. The Dow was at around 4000 when Clinton took office and went on to hit 12000 by 1999.

Bush took office in 2000 and for the next 3 years a series of major events of all kinds – social, economic and financial, resulted in a very erratic market behavior. During that period, Federal interest rates were cut multiple times resulting in very cheap credit. Slowly, the housing mortgage market began growing. Internet and technology companies continued seeing good boosts and grew at phenomenal rates.

The Bush Bull Run from mid 2003 to 2007 was initially marked by the capture of Saddam Hussein. The same period saw tax cuts and rise of internet giants like Microsoft and Amazon. General confidence in US market started growing and companies across industries did well. The Industrial average index saw new Tech companies being a part of it. The year 2005-2006 saw setbacks that had impact on oil (in the form of hurricanes Katrina and Rita) and uncertainty (due to change in Fed Chairman). However those were minor and the general trend was bullish.

The subprime mortgage credit crunch that we talked about in previous posts, characterizes the major dip since end of 2007. As you can see, the fall till date is a very steep one. And every other day marks a new record of historic importance. The past year has seen a tumble of about 7000 points which is more than the points gained in the Bush Bull Run.

While there is no particular conclusion I can or like to draw from this post, I am wondering if I can do something with this and my earlier post about technical analysis and make some predictions. Well then, I guess the agenda for the next post is set and if it doesnt work, I’ll go on and do the Sensex version of this one! 🙂

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6 thoughts on “A decade of Dow

  1. Hi,

    From the graph it seems this Oct 2008, we are almost back to square one of 1998.

    But I dont understand what prompted the index to play the game in between? Can I put it this way – The index value is directly dependent on the trust the investor has on the businesses?

    But, isnt there a twist? A business is as good as the ultimate profit it has. And when that company tries for that extra bit of margin, investors feel its good business. But, the gain they make is the loss of their client. Hence when one business get better, another goes down.

    BTW, the article was a very nice read. Thanks

  2. @ moukound, mocking a jobless blogger eh? 😉

    @ rahul, yes its like getting back to square one and even worse. Like I mentioned in the post, that period in between, where you see the index rallying is when the federal reserve (like our RBI) cut interest rates and Bush cut taxes. Both are a boost to businesses. When fed cuts interest rates, credit is available at a cheaper cost. This will encourage businesses to lend more from banks and invest in expansions, new businesses, product development, IT, global ties etc., so businesses across industries did well. And this coupled with the policy which encouraged outsourcing, worked in favour of some businesses which benefitted by reducing costs and thereby increasing profits.

    You mentioned about the gain of one company being the loss of another when it comes to a particular industry. That may not be the case if the market (demand/customers) itself is growing or if there is innovation, new products, new markets etc. What I mean to say is that, people don’t measure the worthiness of a stock by the company’s profitability alone, they take into consideration all these factors. So when a company in an industry does well, most other companies in that industry do well – that’s how a competitive environment works. Companies that don’t keep up wont survive and that will reflect in their stock prices.
    You can analyse it yourself by looking at the stock prices of say banks in India. There are public and private sector banks, select a few from both, compare their stock performances with the company initiatives/news/performances.

    Index value certainly depends on the trust that investor has. That’s why they talk about market sentiments. But not all investors invest based on a complete research of the company’s trustworthiness or factors mentioned above. Some of them invest on general news and ideas or simply by word of mouth. That mostly refers to individual buyers rather than Mutual funds or institutional buyers who hire people to do the same.

    thanks for your comments.

  3. Suvarna, This is informative.

    The stock index is always the reflection of economy. When the econnomy goes up stock goes up.

    The technology stocks are highly traded in NASDAQ and it reached all time hing during Y2K and .com boom .

    After the bubble burst, NASDAQ did’t come to all time high.
    So, if you are specific on IT , it is always better to have a look on NASDAQ too.

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