Markets

Nir Kaissar is a Bloomberg Gadfly columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.

The Dow Jones Industrial Average -- the granddaddy of indexes -- is famously flirting with a milestone. The Dow closed on Friday at 19,963.80, just shy of the irresistible 20,000.

The Dow will cross over eventually, no doubt to great fanfare. But it’s not clear whether that milestone will be cause for celebration or concern. A look at previous milestones for the Dow is instructive.

The Dow closed at a humble 40.94 on its first day, May 26, 1896. It took the Dow nearly 10 years to reach its first milestone of 100 on Jan. 12, 1906.

Dow 100
The Dow Jones Industrial Average hovered around 100 for 36 years
Source: Bloomberg

It’s not easy to track down news headlines from more than a century ago, but I imagine that Dow 100 was greeted with enthusiasm. The companies that made up the Dow at the time -- mostly obscure names such as Distilling & Cattle Feeding and Tennessee Coal & Iron -- repaid investors with a return of 145 percent since the Dow’s inception.

I also imagine that investors were drunk with profits and expecting the party to continue. What they didn’t know was that it would take the Dow 36 more years to climb above 100 for good. The Dow closed at 101.09 on May 27, 1942. It had returned just 0.8 percent since it first reached 100 in 1906 excluding dividends, which were generally higher then than they are today.  

That’s a deeply disappointing return, but it’s downright depressing when you consider the roller coaster that investors endured for that meager 0.8 percent over those four decades.

It started with one of the worst bear markets in history -- the Dow declined by 47 percent from November 1919 to August 1921. Then came the Roaring Twenties, and the Dow returned a whopping 497 percent from August 1921 to September 1929. That was followed, of course, by the Great Depression. The Dow gave up 89 percent of its value from September 1929 to July 1932.

There would be one more scare during that period. After recovering from the depths of the Depression, the Dow tumbled 49 percent from March 1937 to March 1938. It would take  four more years for the Dow to finally cross over 100 for the last time.

The next milestone was Dow 1,000. The Dow closed at 1,003.16 on Nov. 14, 1972. The Dow had returned 892 percent during the three decades from May 1942 to November 1972 -- a nearly tenfold increase.

Dow 1,000
It took the Dow a decade to move past 1,000 for good
Source: Bloomberg

This time no imagination is necessary. It’s widely known -- and recalled by investors of a certain age -- that investors were ebullient about the Dow’s new milestone. This was the height of the Nifty Fifty craze -- the idea that anyone could get rich by buying the 50 most popular large-cap U.S. stocks. Investors were scarcely aware of the decadelong disappointment ahead.

The Nifty Fifty craze came to an abrupt end when then Dow tumbled 45 percent from January 1973 to December 1974. The Dow would revisit that 1,000 level several times for eight years, finally turning the corner on Dec. 17, 1982, when it closed at 1,011.5. The Dow returned just 0.8 percent during that decade.

And who can forget the next milestone: Dow 10,000. The Dow closed at 10,006.78 on March 29, 1999, near the height of the dot-com bubble. The Dow returned 889 percent from December 1982 to March 1999 -- another nearly tenfold increase.

Dow 10,000
The Dow danced around 10,000 for a decade
Source: Bloomberg

Everyone remembers that euphoric era, when anyone with a discount brokerage account was deemed a burgeoning millionaire. With more than a hundred years of the Dow’s history behind them, investors should have realized that the celebration was premature.

In a nearly identical replay of the 1970s, the Dow tumbled 38 percent from January 2000 to October 2002. Yet again, it would take eight years for the Dow to leave 10,000 behind for good. The Dow returned 1.4 percent during that decade from March 1999 to August 2010.

When the Dow finally reaches 20,000, it will have returned 97 percent since August 2010. By all means, investors should celebrate that milestone when it comes. But they should also be mindful that it may mark the beginning of a new -- and perhaps more sober -- chapter.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nir Kaissar in Washington at nkaissar1@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net