We should all be able to sing along to this… Ready?
“One of these things…
Is not like the other…
One of these things…
They are lines from the show Sesame Street where children are taught to identify patterns by recognizing what doesn’t fit. Seems simple enough.
Now you try it with the list below. Which of the following doesn’t belong?
OK, I made it easy. I put the odd-man-out at the bottom of the list. But the test really wasn’t that hard. Very few people in the world think that all is well. Everyone recognizes that without central bank intervention from the Federal Reserve, European Central Bank (ECB), Bank of England, Bank of Japan, and the Peoples’ Bank of China, the dow today would be in a much different place.
But what most fail to realize is that none of these central banks can fix our issues. So what happens when the shoe finally drops? What happens when there is yet another bailout or stimulus program and suddenly no one cares?
That is when the markets turn south.
That is when the question changes from “How high?” to “How low?”
How Low Can the Dow Jones Average Go?
I know for a fact that the Dow Jones Average can reach zero. If every component of the Dow were suddenly deemed worthless, then the average would be simply zero.
I also know that this will not happen. As long as the markets function, the Dow will be worth something.
So if not zero, then how far can the Dow Jones Average fall?
Our guess is pretty far… all the way down to where the bubble started in the early 1990s, at 3,300.
Now, any rational person would scoff at this and say it makes no sense. This number implies that the Dow would fall over 75%. What could make such a thing happen?
First, recognize that we are not claiming that 3,300 is achievable through a well-reasoned, analysis driven market. Instead, we believe that a panic-driven market can push the Dow well below the lows of 2009 (around 6,500) as fearful boomers liquidate anything they can touch.
Second, the world of capital markets has seen many things crazier than a 75% drop in the Dow Jones Average.
What about the 90% drop in the Dow in the early 1930s?
Or the 80% drop in the Nikkei over the last two decades?
The bankruptcy of General Motors (GM)?
The impending sovereign defaults in Greece and Spain?
What would happen if there were a sudden loss of confidence in paper assets?
At least a dozen possible events would drive major stock indices off a cliff, and several of them seem likely.
Return to the Start
But how do we settle on a target of 3,300 for the Dow Jones Average, instead of 4,250 or 1,884?
Simple. We looked at the history of the Dow Jones Average and pinpointed where the huge run up in the markets began. The meteoric rise in U.S. equities started in the early 1990s with the Dow hovering around 3,300.
We estimate that, like most bubbles, this one will return to where it started.
If we’re off target by 1,000 points or so, that’s OK because the premise remains the same. And the collapse will be equally as painful.
In our Sesame Street investment world, one of the elements is definitely not like the rest… it absolutely does not fit. Look for the equity markets to “fall” in line with the rest of our economic picture… soon.
Ahead of the Curve with Adam O’Dell
Dinosaurs of the Dow
The Dow is often hailed as the gold standard of the U.S. equity markets. Anyone looking for a 30,000-ft. view of the markets simply asks, “Where’s the Dow?”