Monday, February 5, 2024

Dow 50,000

 Dow 50,000

 
Forty years of Dow Jones Industrial Average performance begs the question "When?" not "If?" the DJIA will reach the 50,000 milestone.
 
As often discussed on this blog, the greatest dangers to the financial farmer are taxation and inflation. In regards to the DJIA, we can clearly see the effects of inflation; the average has a relatively stable linear trajectory from 1984 to 2024. Albeit, there are some SERIOUS instances of volatility cause tremendous slides and spikes. 

With that said, we are about 32% away from Dow 50,000 or just about a third. Over the past forty years the Dow has risen some 37,000 points or 3200%. Is America 32X BETTER than it was in 1984? Doubtful.

As best I can tell, the major "advances" over the past 40 years have largely been in the PRICES. Real wages have fallen after having peaked sometime in the early 1970s. What has increased? The price of nearly everything save perhaps for COMPUTING power. And that is what I argue has been the REAL growth over the past 40 years, indeed perhaps even dating back to the invention of the microprocessor itself.

Nearly every component of the Dow, the the members have changed significantly over the past 40 years, have by definition been industrial companies. Over time though those components have weighted more and more towards technology. The same can be said of the broader S&P 500 Index, whose 505 members are a cross section of the largest companies in the United States.

Today fewer companies make more of the profits, and naturally those companies have higher market capitalizations. It has gotten so extreme that less than a dozen technology companies account for the majority of the capitalization. 

There have been several seminal events over the past 40 years of Dow performance which has driven the market significantly higher. In the early 1980s the taxation structure was significantly changed in the United States under President Reagan. This led to an unprecedented boom.

After the crash in 1987 and recession in the early 1990s I argue the next seminal event was in December 1994 when the Netscape Navigator browser was released. That opened the world to the internet. And even during multiple upheavals during the next 30 years the internet gradually came to dominate global commerce.

I believe we are at a similar inflection point to December 16th, 1994 the day after Netscape Navigator was released with AI today. Via ChatGPT and distribution via the largest company in the world, Microsoft, I believe the world again is going to pivot higher in terms of real growth.

What does this mean for the Dow Jones Industrial Average? Assuming more of its components harness AI, or are even replaced in the Index BY AI-dominate companies, the Dow itself should see meaningful increases in the year(s) ahead and not just due to inflation, but rather TRUE growth in terms of productivity. If the Netscape theory holds, then we should see Dow 50,000 sooner rather than later.