Some Striking Lessons From the Past

22.12.2016 • Central Banks

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By Tim Price – The Price Report (GBR) –

In 1999, as the dotcom bubble was giddily inflating to ever more extraordinary levels, the staff at Merrill Lynch Private Banking – where I then worked – were issued by management with a book that encapsulated the spirited insanity of the times: Dow 36,000, by James Glassman and Kevin Hassett.

The title says it all. The book set out to convince its readers that “the single most important fact about stocks at the dawn of the twenty-first century: They are cheap.”

The argument of the book, if you can call it that, was that stocks were perceived as “risky” investments by comparison with “safe” instruments like government bonds. Treat those assets as equally risky, and fair value for the Dow Jones Industrial Average in 1999 would be 36,000.

The stockmarket, however, had other ideas.

 

As you can see from the chart, from 1 October 1999, when Dow 36,000 was published, the Dow did not cheerfully ascend to anything like 36,000. It actually lost a quarter of its value, and three years later was testing support close to 7,000.

The presenters at the cable business channel CNBC have recently been anticipating the Dow’s approach towards the 20,000 level. Seventeen years on from Glassman and Hassett’s prediction, the Dow is still 16,000 index points away.

(The Dow Jones Industrial Average is itself something of a curate’s egg. Its origins go back to 1896 when Charles Dow first calculated it. The Dow comprises just 30 stocks, picked somewhat arbitrarily by the “Averages Committee” to represent the US economy. It is a price-weighted measure, which means that those stocks with a high dollar stock price have a disproportionate impact on the Average itself.)

Here’s another example of financial media hubris.

On 14 August 2000, Fortune magazine published an article entitled “Ten Stocks To Last The Decade”. Although the bloom had already started to come off the dotcom rose – the Nasdaq had peaked in March 2000 – Fortune’s top ten, and their share prices at the time, looked as follows.

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