Part 3 - The Outlook for the Dow in 2009

A Personal View, continued
October 16, 2008 As alluded in Part 1, major factor in the fall in the Dow Index has been deleveraging by banks, investment banks, mutual funds, hedge funds, and individuals.

To date in 2008 there have been several well publicised cases of failure or emergency support, involving large banks and investment banks.

However, it seems highly likely there are many lesser players who cannot survive the chaotic daily trading swings and will succumb as forced sellers, perhaps via trading losses, margin calls, and/or excessive redemptions.

Thus it is to be expected that the names of other, smaller failures will emerge over the remainder of this year.

This has all followed the credit/housing/leveraging bubble in the Dow Index from late 2006 to mid 2008, so that the Down Index for that period, from late 2006 to early 2008 needs to be discounted.

In Part 1, I commented on the Dow Jones Industrial Average. These graphs below show the Dow Index and relative share volumes from 1928 through to Oct 16, 2008 in the top graph. Then the most recent five years in the middle graph and just the latest year in the bottom graph.

The graphs better illustrate what I said in Part 1; "Using a 2008 low point of say 8450 and the 2007 peak of 14165, a simple average is about 11300. The 11,300 mark represented the level of the Dow in late 1999 and was touched again in 2000, 2001, and also between 2006 and 2008. The equilibrium level between 1999 and 2008, however looks closer to 10000 and so between 10,000 and 11000 seems a more likely target range over the next year or two.

With 12000 being a more likely maximum recovery by 2010 than the previous peak of 14165.

Thus, as a result of the financial crisis, there may be a small decline in average living standards in America and Europe, perhaps equivalent to the loss of two or three years of growth, say of the years 2006 to 2008. This would be an inconvenience for most people in America and Europe, but not a catastrophe."

There seem to be varying opinions as to when the various economies will recover. My personal view is that it will take longer than many people think. I would be surprised if the Dow reaches 11000 before 2010.

My reasons for saying this are the number of people "burned" at both ends of the market.

At the top end, banks, funds, and wealthy private investors will be very cautious with lending and investing for at least 12 months.

At the bottom end, ordinary people have seen both their house and stock investment values fall. Many have already lost jobs and the number losing jobs is likely to increase.

Thus, nearly everyone will have seen their personal assets fall in value and/or know someone who has lost their job or had their business fail.

Foreclosed, unsold, and partially completed housing will be a constant visual reminder of the crisis for a year or more.

Until confidence is recovered, people will hold onto their old cars for longer and wear their clothes longer. Anecdotally, I have heard of recent increased foot traffic at estate auctions and at stores which recycle clothing.

A personal prediction is that prices for antiques will increase significantly during 2009 and beyond.

This will be because partly as there will tend to be a mood to look backwards with nostalgia and away from the minimalist style, which will likely be seen as associated with the financial excesses of recent years.

But price increases will also occur as antique furniture and other antique decorative items are recognised as appreciating assets, in contrast to minimalist items which probably fall in value by 25% to 50% as soon as they leave a store.