No Bull: Dow's Glory Days Are Over

There's nothing like a looming anniversary to make you contemplate some of life's bigger questions. And we're closing in on a big date for us stock-market types: six years since the all-time high of the Dow Jones industrial average.

On Jan. 14, 2000, the Dow closed at 11,727.98, up more than 140 points on the day. Market mania was in full swing. The economy was in a stock-fueled boom, Internet giant America Online had just announced its purchase of Time Warner, with analysts gushing about how that supposedly brilliant deal would transform the media landscape.

It seemed it would be only a matter of time until we saw the Dow reach 12,000 and 20,000 and points beyond. Instead, the Dow swooned after reaching that record high, then plummeted and has since rebounded.

Why am I inflicting all this history on you? To make a point: that true love may last forever, but in the financial markets, nothing does. That's true regardless of whether we're talking about stocks or houses or today's favorites like oil or gold.

Six years ago, almost everyone except a few old grumps was saying that the traditional ways of valuing stocks were obsolete and that stocks would go up forever. They didn't. By the time the Dow bottomed in the fall of 2002, reverse polarity had set in and seers were predicting a new era of lower stock prices. Instead, the market turned around.

You can see some of that old-time bull market triumphalism seeping back as the Dow flirts with 11,000, a number that has absolutely no economic value and only limited psychological value.

Besides, focusing on the daily Dow means you're looking at details and missing the big picture. Which is this: Stocks, as defined both by the narrow 30-stock Dow average and by useful broad indexes, such as the Standard & Poor's 500 and the Dow Jones Wilshire 5000, are still below where they were six years ago. (We won't even talk about the Nasdaq, still more than 50 percent below its high.) Had stock prices continued rising at their historical rate, the Dow would now be around 18,000 -- more than half again as high as it is now.

Stocks, as measured by the S&P 500, returned almost 20 percent a year, compounded, from August of 1982 through early 2000. An entire investing generation got used to seeing the value of its portfolio double every 3.5 years or so. That created an environment in which your 401(k) almost couldn't help but do well. Memories of the boom years were so strong that last year President Bush could tout private Social Security stock market accounts as a way to make millions of Americans rich, without his being immediately laughed down.

But that bull market, which saw the Dow rise 1,400 percent in less than 18 years, is so over . The odds of seeing anything like it again in our lifetime are, at best, remote.

Finally, the fact that we're even discussing the Dow shows the power of history and myth. The Dow, created in 1896, is an arithmetical average calculated by adding up the share prices of 30 stocks and dividing the total by a wonderfully precise number, most recently 0.12493117.

The S&P 500 and the Wilshire are much more important, broad-based indexes that are keyed to the stock market's overall value. In the S&P 500, a dollar change in Microsoft's 10.6 billion shares counts about 18 times as much as a dollar change in General Motors' 565 million shares. But in the Dow, a dollar change in either stock moves the average by the same 8.004 points.

Dow Jones says about $21 billion of investments are tied to the industrial average. S&P says $1.1 trillion -- 50 times as much -- is tied to the 500, which is the benchmark that analysts use to measure investment performance. Yet when people ask whether the market's up or down, I tell them about the Dow. Go figure.

But enough, already. Why ruin a perfectly good anniversary with all this heavy thinking? I don't know about you, but next week, I'll be thinking about singing happy anniversary and eating cake. Regardless of whether the Dow -- or the stock market -- is going up or down.

Sloan is Newsweek's Wall Street editor. His e-mail issloan@panix.com.