About 6 months ago, I had a post about how the stock market really wasn't that great of a deal, once you factored out two things, inflation and a seemingly anomalous jump in stock prices from 1995-1998. Well since then, a lot has happened. For starters, the dow has dropped another ~3000 points.

So I decided to revive that old graph and add in the new data.

One thing became quite clear as I was doing it: if you simply assume the 1995-1998 period was the anomaly, then everything else — the present crash included — suddenly makes a lot more sense.

In the following graph, all I did was remove a fixed offset from the 1998-2009 period to minimize the LS fit to the 1928-1995 trend. Basically that's saying that if in 1995 the then-70 year trend for stock prices had continued (with the ups and downs of the past decade as the variance around that trend), then this is what the 1998-2009 period would look like:

Download djia_95_to_98_detrend.png (59.4K)

Now you'll notice a couple things. First, the graph doesn't seem that discontinuous. Considering I subtracted almost 7000 pts from the Dow, it's surprisingly hard to notice the discontinuity the first time you look at the graph.

The other thing you'll notice is that way, way down on the bottom right (at $80) is the current value of the Dow when shifted this way. However, the present value is actually more like $6000. You'll also notice that the ~70-year trend (the slow moving blue curve) projected the present value at around $5,800.

What this means is that, if someone in 1995 was trying to determine the value of stocks in March of 2009 using only the historical growth rate as the guide, they would've come pretty close — on the low side by only $200. It also means that, perhaps — perhaps — the past 14 years were the anomaly (caused by what, I don't know) and the stock market is just now finally getting back to the normalcy it had for the previous 70 years.

UPDATE: At the prompting of my brother, I decided to scale the 1998-2009 period rather than shift it. This seems more appropriate given that the stock market generally seems more sensitive to percent changes, not absolute changes. The resulting scale factor for the 1998-2009 period to best fit to the earlier trend line is 0.47 (i.e. the last decade saw the dow jones more than 2x what it might've been), resulting in the following figure:

Download djia_95_to_98_descale.png (57.8K)

This looks even more like a graph of how this period should have looked than the shifted version.