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Dow Milestone: Good News or Trouble’s Reflection?

Chart of Dow between 1906 and 2006Thrills and chills for investors today. The Dow reached $12,000, a new incremental milestone in the American stock market. While this new record might seem to bode well for America’s economy as gas prices decrease, a different perspective looms large in the face of North Korea’s interest in nuclear power and the continued war in Iraq. The Dow represents a collection of conservative blue chip stocks that are well known as a safe investment haven in comparison to commodities and other market indices such as NASDAQ. In support of this perspective, one look at the Dow’s record high history shows that this index seems to peak most often during times of political and economic instability and during American involvement in foreign wars.

When the timeframe of the Dow’s record $1000 highs is isolated from today’s cautious hoopla on Wall Street, the reader might wonder why those highs occurred at specific moments in time. One example includes the previous record that marked the $11,000 high that took place in July 1999. This milestone represented the final note to a decade filled with eight Dow records. If you consider that the Dow reached that $1000 marker only eleven times since 1906, this insight speaks volumes for the overvaluation that occurred in American stock exchanges during the twentieth century’s final decade:

· From Jan 1906 to Nov 1972: $100.25 to $1003.16 = 66 years
· From Nov 1972 to Jan 1987: $1003.16 to $2,002.25 = 15 years
· From Jan 1987 to Apr 1991: $2,002.25 to $3,004.46 = 4 years
· From Apr 1991 to Feb1995: $3,004.46 to $4,003.33 = 4 years
· From Feb 1995 to Nov 1995: $4,003.33 to $5,023.55 = 0 years
· From Nov 1995 to Oct 1996: $5,023.55 to $6,010.00 = 1 year
· From Oct 1996 to Feb 1997: $6,010.00 to $7,022.44 = 1 year
· From Feb 1997 to Jul 1997: $7,022.44 to $8038.88 = 0 years
· From Jul 1997 to Mar 1999: $9033.23 to $10006.78 = 2 years
· From Mar 1999 to Jul 1999: $10006.78 to $11209.84 = 0 years
· From Jul 1999 to 18 Oct 2006 = 7 years

If the records shown above were spread out equally over the years between 1906 and 2006, the Dow would have increased on average by approximately $1000 per decade. This upward movement might seem comforting, but in comparison to cost-of-living increases and the value of the dollar over the past century, the Dow simply has increased in response to economic realities. In contrast to this average evaluation, the Dow seems to peak in increments as a response to political and economic strife and warfare.

The First Milestone

For instance, the first sixty-six year climb covered an era that included two World Wars that helped America to accomplish a new standing as a world power, the Korean War and the Vietnam War. The climb was mitigated by the depression, so this progression could not reach its first milestone until 1972, a year that represented one of the most active periods during the Vietnam War. In that year, North Vietnam refused to actively participate in peace talks, and former President Nixon (Republican) responded to North Vietnamese advances with increased bombing.

When the Dow reached its first $1000 milestone, Americans were presented with filmed footage and a still photo of a badly burned girl as she fled a village that had been destroyed by American napalm. Her clothes had been burned from her body. That image endures as a symbol of a war that was out of control, and that lack of control was exemplified by increasingly violent anti-war demonstrations at home.

The Second Milestone

A breath-taking drop followed the second high, which occurred a mere fifteen years after the first milestone. But, the Dow recovered to climb quickly to the next milestone four years later in 1991. Since the second high occurred in January 1987, a look at the events that occurred at the end of 1986 is appropriate.

President Ronald Reagan (Republican) was serving a second term in office during 1986 and, in contrast to his first term, this second term was plagued with problems that were exacerbated by an increase in international terrorism. The problem centered on a series of airplane hijackings that began with TWA Flight 847 in June 1985 and that escalated with other hostage situations that involved Americans who resided in or who visited the Middle East. Groups associated with Hezbolla laid claim to the kidnappings.

Reagan and other members of his administration, including Oliver North, worked successfully to obtain the hostages’ releases with a direct sale of arms to Iran at a time when Iran was embroiled in the Iran-Iraq war. When news about the deal was leaked in November 1986, Reagan denied the charges. But Reagan’s diary proved that he had authorized the sale, and he admitted to the Iran-Contra affair three months after the Dow had hit that second milestone in January.

The Third Milestone

The third Dow high in 1991 occurred during George Herbert Walker Bush’s (Republican) midterm in office as president and also during Desert Storm’s final months. Although the collapse of Communism and the end of the Cold War in 1989 appeared to leave America without a clear military mission, Iraq’s invasion of Kuwait quickly initiated U.S. involvement in the Persian Gulf War. But, by April 1991 – less than two years after America’s involvement – a cease-fire had been implemented, aid was granted by the U.S. and the U.N. to the Kurds, and troops were deployed home.

Despite what appeared to be a clean-cut war effort that was applauded by Americans when they compared it to Vietnam, Bush’s vow to cut taxes had not been implemented and the economy had weakened in comparison to Reagan’s final term. Although Reagan had been involved in scandal, that affair was forgotten in the face of a soaring stock market and what appeared to be a strong economy. Bush, on the other hand, seemed to neglect the country’s economy in favor of a successful war effort. In reality, the combined Reagan-Bush administrations created a $300 billion federal deficit.

The 1990 Jumps

The 1995 and 1996 Dow records occurred at the halfway point during President Clinton’s (Democrat) first term in office, and the last three records occurred during his second term in office. Although Clinton was a Democrat, the Republicans swept to victory in the House and Senate under the leadership of Newt Gingrich. By the time the Dow reached the 1995 milestone, the Republican ascendancy had become a target for American disapproval. Americans especially disfavored Gringrich’s march to dismantle government programs that protected the environment, education, and Medicare.

Finally, the Republican majority stumbled off its perch when it decided to force a government shutdown unless Clinton signed its budget. In response to Clinton’s veto on Republican-passed spending bills in the fall of 1995, the Republican Party closed government offices and shut down national parks. American sentiment forced the party to reopen offices in January 1996, but the damage was done. These antics colored the Republicans with a “mean streak” that worked to Clinton’s advantage.

The Republicans maintained a majority in the House and Senate throughout Clinton’s presidency, and this party never ceased criticism and attacks on a highly rated president. Although Clinton bungled his term in office with a widely publicized adulterous affair in 1998, Americans were unwilling to impeach him despite Republican outcry. Only during 1999, after the Dow hit its last two previous highs, did the Dow settle into a lull.

At that time, Americans realized that Clinton could not serve a third year in office. Additionally, both Democrats and the Republicans lacked a strong representative to replace Clinton. Although Clinton had his faults, he had taken the country’s deficit from deep red to black; and, Clinton was applauded for his foreign policies despite little experience in foreign affairs and despite an unpopular decision to send financial support to Russia in 1999. But, the continued strength of the Republican Party within government had, along with Clinton’s weaknesses, worked to divide the country almost equally into two political camps.

This political division worked toward the scandalous election in 2000, an election that was marred by political fights, declarations about vote tampering, and a recount in Florida that further divided public sentiment. George Walker Bush (Republican), George Herbert Walker Bush’s son, was elected into office that year in a slim margin against Democrat Al Gore. Despite the controversy, Bush redeemed his standings with broad base tax cuts and with the sweeping educational bill entitled, “No Child Left Behind.” He was in Florida promoting the latter program when terrorists attacked America on 11 September 2001.

The Road to the Latest Milestone

Although the Dow continued to move upward during the election scandal, it descended in response to the attacks on the twin towers in New York and to scandals created by corporate CEOs – affairs that marred the Dow’s corporate face. The Dow began to move upward again about 2003, precisely when American troops attacked Iraq and gained control of Baghdad. And, as the war in Iraq has become less popular and more intense, the Dow has continued to its upward movement in response. Today, as the Dow peaks to its eleventh $1000 milestone, America is embroiled in the middle of what some call an Iraqi civil war.

Additionally, political efforts for local elections are in full swing across the country, and political pundits have predicted that the long-term Republican sway over government will end with these election results. Republicans have come under fire for illegal behaviors, for political bungling, for the decision to attack Iraq, and for waffling on when and if America will pull out of the Iraqi war. Political instability seems to have increased the investors’ faith in conservative corporate investments despite a strong belief that corporate America currently supports and sometimes maneuvers many political decisions.

Since President Bush has served two terms, Americans are once again faced with a new choice for president in two years. The difference between now and when Clinton left office, however, is that the country is once again in debt. Only, this time, the amount currently equals $8.5 trillion, an amount that makes the $300 billion deficit that accrued during the Reagan and Bush, Sr. years seem paltry.

Conclusion

But, you might ask, if the Dow seems to peak with political and economic problems and warfare issues, why, then, did the Dow break more records during Clinton’s administration than it did during the entire twentieth century? Although Clinton agreed to join NATO in a massive bombing campaign against the Serbian government to end its “ethnic cleansing” of Albanians in the Kosovo region in 1999, this presidency did not seek active war against another nation. And Clinton changed the color of the federal deficit from deep red to black. But, the Republicans did create a hotbed of controversy during the entire Clinton presidency that seemed to make Clinton’s infidelity seem a minor issue.

Aside from the political influence on Dow movements in the 1990s, that decade also introduced investors to home computers and to online brokerage firms. Many Americans learned how to create portfolios through the Internet, and inexperienced investors and day traders might have influenced the overvaluation of the Dow with their enthusiastic activity. This observation has support in the simple fact that volume increased in the market during that decade. Additionally, the NASDAQ also climbed up the charts along with the Dow during the 1990s, yet the NASDAQ hasn’t replicated the Dow’s recent success. The NASDAQ, which is comprised of technical companies, has become the slow-growth index as cautious investors move into blue-chip stocks and away from high-risk investments.

The reader might now ask whether the Dow will continue to rise or if it will travel sideways for the next few years. Many analysts have predicted a sideways movement with consideration to the presidential election in two years. However, the nuclear problem in North Korea might represent a new opportunity for the Dow to reach $13,000. If America becomes involved in another war, investors may continue to flock to the Dow. On the other hand, a war with North Korea also could cause a complete market collapse.

No one has a crystal ball that can predict market behavior. But, with some historic perspective, a person might be able to evaluate how the Dow might move in response to political strife, economic instability, and increased war efforts. This upward climb seems to be mitigated only by corporate scandals, attacks on American soil, and by times of peace and economic prosperity.

NOTE: Despite my observations on the Republican Party above, I want to reassure you that I’m not a Democrat nor a liberal. I am registered as an Independent as I don’t believe in party affiliations. So I’m also not a Republican nor a conservative. I’m one of those middle-of-the-road folks who wishes that all politicians would focus on issues rather than on negative attacks against each other.

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