Dow Jones’ Bear Markets & All-Time Highs (1885 to 2014)

A week ago everyone was bearish; this week with the market’s recovery it feels safe to buy a growth stock again.  I’m not so sure everything is fine; in fact I’m still damned bearish on the stock market.  But before I go into that let’s look at the history of Dow Jones bear markets and its all-time highs since this historic stock market series was first published in 1885 using a Bear’s Eye View (BEV) chart.  Please note that the Dow Jones’ 1885 to 2014 BEV chart uses weekly data.  However, as my Dow Jones daily data begins on 02 January 1900, all other charts and tables are daily basis.

A BEV chart is easy to understand; each data point is divided by its last all-time high and then 1 is subtracted from it.

          Data Point ___  -1

Last All-Time High

The results are displayed below: 129 years of Dow Jones bull and bear markets treating each new all-time high since 1885 equally, displaying a value of 0% (called a “BEV Zero”).  I call this charting technique The Bear’s Eye View as it’s no coincidence that this is exactly how Mr Bear sees each of these new all-time highs: whether it was 78.26 on 17 June 1901, or our latest all-time high of 17,297 on 19 September 2014, all he sees are big fat ZEROS.  Mr Bear isn’t impressed by new highs in the Dow Jones because the only thing he cares about is how many percentage points he can claw back from each of them.  During bull markets, he’s lucky to get back 10%-15%.  These small-temporary declines are called “bull market corrections,” from which the Dow Jones will rebound to make another, in a string of new BEV Zeros seen during a bull market.  Eventually however, every bull market reaches its final all-time high, as is painfully evident below. Mr Bear sometimes claws back 40% or more from a BEV Zero during historic bear markets. 

The last BEV Zero of a bull market is called the Terminal Zero, or TZ.  For the Dow Jones, its most famous TZ occurred on 03 September 1929 at 381.17.  One hundred and forty nine weeks later Mr Bear had clawed back a total of 89.19% from the Roaring 1920s top, creating the left wall of the canyon below which we know as the “Great Depression.”

With a quick study of the Dow Jones’ BEV plot above, something unusual becomes evident; not since 1885 had the Dow Jones seen so many new BEV Zeros in a five year span as occurred from 1925-29. 

But how often has the Dow Jones seen a new all-time high?   The table below gives the frequency distribution for Dow Jones’ BEV Data from 02 January 1900 to today (31,156 trading days).  Since January 1900 the Dow Jones has seen BEV Zeros (0.00% = new all-time highs) on 1,208 trading days (3.88% of total trading days). 

Before I go on I need to explain how this table works, specifically its -0.0001% category.  The percentages listed on the left actually bundle a range of daily percentage moves.  To exclude all other daily moves that were not actual all-time highs in the 0% row (BEV Zeros), it’s necessary to include the -0.0001% category in the distribution.  So, all daily moves not new all-time highs (but darn close to one), and those within -5% (actually -4.999999%) of their BEV Zero are bundled in the -0.0001% row.  Moves between -5% and -10% (actually -9.999999%) are bundled in the -5% row, and so on and so forth as we progress down the table.

Note the -50% row; since January 1900, 5,393 (17.31%) of Dow Jones trading days have closed 50% * OR MORE * from their last all-time high because of the Great Depression crash, as is evident in the Dow Jones BEV chart above.

Before the Great Depression, the most famous stock-market crash occurred in 1907, which was born from a bull market that saw just thirty-two new daily all-time highs beginning on 31 October 1905 to its TZ just three months later on 19 January 1906.  During the “Roaring 20s Bull Market” the Dow Jones made 215 new daily BEV Zeros, with only one 15% correction.  The comparison of the two frequency distributions below shows just how crazy the Roaring 1920s stock market became.  Including the number of days found in the 0% and the -0.0001% categories, we see that a full 75% of the 1379 daily closes from January 1925 to September 1929 were within 5% of a new all-time high – Wow!

The Dow Jones price plot below also illustrates just how different the 1920s were from all previous Dow Jones bull markets, the difference being that the Federal Reserve existed during the 1920s, whereas from 1905-07 it did not.

Take a moment to study the Dow Jones from 1900 to 1929 using the charts and tables above and below.  Before 1925 bull markets made very few new all-time highs, and their tops rose only a few points above a previous bull market’s last all-time high, if they did at all.  Restrained market values were to be expected during the gold standard, when gold restricted the creation of currency and credit by the banking system.  But all that changed during the Roaring 20s’ when the Dow Jones’ September 1929 Terminal Zero soared far above all previous bull market highs.  If the dragon-of-deflation terrified the nation during the 1930s, it’s only because the engine-of-inflation (The Federal Reserve) had inflated a horrific bubble in the stock market during the 1920s, as well as in the real estate and consumer debt markets.

Returning to the Dow Jones’ 1885-2014 BEV chart above, from 1954 to 1974 we see many BEV Zeros, suggesting that the Federal Reserve was once again inflating the Dow Jones valuation, but that wasn’t the case.  From 1966 to 1982, seeing the Dow Jones approach the 1000 level was regarded as a solid signal to sell; in fact by the early 1980s, 1,000 was known as the Dow Jones’ line of death.  When the Dow Jones began its historic bull market in August 1982, and finally broke above 1000 for the last time, many market watchers refused to believe it could keep going.

So, it’s fair to say that only the bull market that began in 1982 should be compared in the BEV chart above to the Roaring 1920s bull market, which is done in the next table.  Comparing the totals for the 0% and -0.0001% categories of the two bull markets below, the Roaring 20s bull market with 75% of its closing prices within 5% of a new all-time high was more energetic than the 1982-2000 bull market with its 69%.  However, when viewed from the perspective duration of inflating valuations, there is certainly no comparison between the 1920s and the 1982 to 2000 bull markets as one lasted only five years while the other eighteen years. 

With Alan Greenspan in charge of “monetary policy” from August 1987 to January 2000, Members of Congress, “media experts” and investors believed that surging valuations were a permanent fixture of the market – but with the coming of the 21^st century things began to change (as seen in the Dow Jones’ 1885-2014 BEV chart above, and its price chart below.)  Yes, since January 2000 the Dow Jones has proven that it can make new all-time highs, but they are not as numerous as before and are soon followed by big bear markets.

The red boxes above highlight price and time periods when new all-time highs were being made, but realize that from the 1982-2000’s bull market’s first BEV Zero on 03 November 1982 (Dow Jones: 1,065.49) to its final Terminal Zero on 14 January 2000 (Dow Jones: 11,722.98), the Federal Reserve had inflated the Dow Jones’ valuation by 10,657 points over a period of eighteen years.  That’s some impressive “policy making”, but not as impressive as what they accomplished just this September.  From the bottom of the credit crisis bear market (6,547.05 / 09 March 2009) to the Dow Jones last BEV Zero (17,279.74 / 19 Sept 2014), the Federal Reserve inflated the valuation of the Dow Jones by 10,732 points in just five years.  But as this article focuses on Dow Jones all-time highs, it should be noted that only 3,115 of those post March 2009 Dow Jones points are above its October 2007’s terminal zero.

Just to satisfy everyone curiosity here are the BEV frequency distributions for the 1982 to 2000 Dow Jones bull market and the post High-Tech Bubble market.  Look at the -0.0001% category; floating on an ocean of “liquidity” from the Greenspan Fed, from 1982 to 2000, 58% of the Dow Jones 4348 daily closings were within 5% of a new all-time high.  Not so since January 2000, thanks to the law of diminishing returns.

Note on the table below: the dates and valuations are only for those periods where the Dow Jones was breaking into new all-time highs.  For instance; the current bull market (2009-2014) for the Dow Jones may have begun in March of 2009, but it wasn’t until March 2013 that it broke above the terminal zero of the 2002-2007 bull market.  That is what this table is highlighting; those periods when the Dow Jones was making new record highs.

After the Roaring 20s bubble the stock market produced an excruciating 89% bear market decline, why did the Dow Jones decline only 38% as the high-tech bubble deflated?  Because fear that the stock market and economy could suffer another Great Depression the “policy makers” began inflating another bubble in the single family housing market, which resulted in the 2002-07 bull market. 

We should note how the 2002-2007 (mortgage bubble) bull market’s terminal zero rose merely 20.78% above the previous high-tech bubble’s terminal zero.  I don’t know if the current bull market’s last all-time high (19 Sept 2014 / 17,279.74) will prove to be its top (terminal zero).  However it’s interesting that our current Dow Jones bull market has also advanced the Dow Jones about 21% above the 2002-2007 bull market’s terminal zero.  This is about the same percentage advance above the high-tech bubble’s terminal zero made by the 2002-2007 bull market before it began its 53% decline.

Let’s assume that there is no correlation between the 2002-2007 bull market’s 21% advance above the high-tech bubble’s last all-time high, and its subsequent  54% bear market, and that our current bull market’s 21% advance above the 2002-2007 bull market’s terminal zero is sitting on a hard floor of stone;  just how much higher can the Dow Jones soar into record high territory? 

As it’s commonly agreed that our current bull market is a phenomenon of “monetary policy”, how high the Dow Jones can soar should depend upon how much “high-octane money” is created by the Federal Reserve and “inject” into its banking system.  As the Federal Reserve obtains this “high-octane money” primarily through monetizing the US National Debt, it seems the Federal Reserve is approaching a time when there won’t be enough Treasury Debt to monetize.

Currently the Fed and its banking system (free reserves) own 39% of the US Treasury market, but just twenty years ago when the Dow Jones was valued at 4,400 they owned just 7.61% of the market (table below). 

I haven’t a clue what goes on in the minds of the idiot savants that manage “monetary policy”, except I do know that they want market valuations in stocks, bonds and real estate continually inflating to ever higher valuations from one year to the next.  If in the coming years the FOMC intends to inflate the Dow Jones to 100% above its 2002-2007 terminal zero (14,164 * 2 = 28,328; a percentage increase the Dow Jones easily exceeded during the 1920s and 1990s bubble decades), will the Federal Reserve have to monetize 50%, or more of the US National debt to make that happen?  Well, if you want the Federal Reserve to maintain “stability” in the financial markets, (meaning to keep derivatives, particularly interest rate swaps, valued at one quadrillion dollars out of the money), they have to “monetize” something to keep the dragon-of-deflation at bay!

As seen in the chart below, the Federal Reserve’s footprint in the Treasury Market increased from 4.6% in November 2008 to its current 23.5%; the same window of time where the Dow Jones appreciated 10,732 points (164%) from its March 2009 lows to its last all-time high of a month ago.  If you wanted an example of “economic growth” in the 21^st century; there isn’t a better one than what we see below.

Well, as long as the global markets choose to ignore the inflationary implications of “economic growth”, the Federal Reserve will continue to monetize as much of the ever growing US National Debt as they believe they can get away with and the stock market will continue its advance.  However, every bull market ultimately sees its Terminal Zero, the point where currency and credit creation is overcome by market gravity.  And the higher one flies, the farther one has to fall to come back to Earth.

I thought I’d end this article with a quote provided by Dr. Marc Farber of the Gloom, Doom & Boom Report.

"As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.

...That is precisely the path that we began over 4 years ago in pursuit of our national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification, and demonization we have endured from across the political divide.

...Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multilateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what's good for goose is not good for the gander.

...As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances."

- Dr. G. Gono, chairman of the Reserve Bank of Zimbabwe (no hoax):  Quote provided by Marc Farber of the Gloom, Doom & Boom Report.

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