Dow 15,000: What's the big deal?

Yesterday's job report said only 165,000 jobs were added in April -- anemic by historical standards but more than "expected," so woohoo!, the stock market celebrated by sending the Dow Jones Industrial Average over 15,000.  (Briefly; it closed at a record high of 14,973.96.)  Commentators seemed to find this significant, as if the DJIA's touching the dizzying height of 15,000 was proof of renewed economic prosperity.

But is it?  Is Dow 15,000 "high" in the history of that index?  Or is it what would be "expected" at this point in time, given how the index has grown in the past, or is it even "low."  If that level is only "expected," then the index's hitting 15,000 is not really news, and certainly not an indication that the government's economic policies are doing anything special.  But if it is "low," the news is that the economy is still under-performing, despite years and years of billions of dollars of funny money being pumped into the markets by the Fed, and despite so-called "stimulus" deficit-spending by the government.

So, let's look at that history.  Do you remember where the DJIA stood the month before Ronald Reagan was elected?  4000?  2000? 1000?  Nope, lower than that.  It was 950, in a range it had been for years before. Looking at the index each year (October) after that, we see it dropped in 1981, but in 1982 it went up to 987, a 17.8% increase from the prior year. In 1983 it went to the dizzying height of 1264, a jump of 28%.  By the end of the Reagan-Bush years, in 1992, the index stood at a mind-blowing 3240, an increase of 241%, or an average of 18.5% per year.

As everyone knows that level of growth just isn't sustainable -- but it was even better throughout the Clinton years. From 1993 to 1999 the DJIA clocked regular, and huge, increases, and by October 2000 it stood at 10,192.  That was an increase of 215% from 1992, or an average of 23.8% per year.

After 2000, the DJIA practically hit a brick wall. In 2005 it was still around 10,200, and by 2008, following the financial crisis spawned by loose credit and the asset bubble that resulted, it had fallen to 9325. That is where it stood when Obama was elected.

I have my theories as to why the pro-growth policies of Reagan-Bush continued to pay dividends despite the Clinton tax hikes -- in general, even after Reagan-Bush, we continued to enjoy less regulation, less hostility to business and investment, more encouragement of research and technology development, and economic stability fostered by national and international security (in turn fostered by our military might) -- and why some anti-growth policies of the Clinton years began to be felt in 2000, before George W. Bush took office.  But that's beside the point. My focus here is on what the DJIA could be today if the growth it  enjoyed from 1980 to 2000 -- or even just in the Reagan-Bush years -- continued to 2013, as the prosperity, wealth creation and improved standard of living we all enjoyed during that period is the "normal" we still aspire to.

As it happens, however you dice the numbers, the Dow should be way above 15,000 now.  Here is a graph of the DJIA from 1980 to 2013 (using an October close as a proxy for the year):

Average annual growth in the index, as noted above, was 18.5% during Reagan-Bush, and 23.8% during Clinton.  What if we just took that lower figure and assumed that rate of growth continued after Reagan-Bush (as, in fact, it did during Clinton)?  Here is where we would be now:

Yes, we would be at Dow 115,000.  Your 401(k) would be a 4001(k), ten times bigger than it is.  You would be looking forward to an early retirement, not looking to work until you're 75.  You would be looking at a second home, a new car every few years, comfortably paying for college, paint for your house, a real vacation now and then.  At a minimum you would not be scrimping to get by and not constantly worried about how you were going to pay your bills.  That is "normal."

As the graph illustrates, an annual 18.5% growth rate was not "unsustainable" from 1992 to 2000.  There is no reason to assert it was unsustainable thereafter.

But let's say it was.  Let's say despite 20 years of 18-23% annual growth, only half of the Reagan-Bush growth rate continued post-2000.  Here is where we would be now:

Thus, we would be at Dow 35,000. Dow 15,000 is not even half of where we could be in this scenario.

Finally, even if you straight-line the trend from 1986 to 1999, so that the percentage growth each year is smaller than the year before, but the growth is constant, and extend that post-2000, we still should be above Dow 15,000:

No matter how you look at it, Dow 15,000 is low.  It is one-seventh of where it could be if the average growth of the Reagan-Bush years continued, and that is the "normal" we want. But even if growth had been pitifully slow, and just constant, we should be at Dow 17,000.

Dow 15,000? Big deal. Now excuse me while I go find some way to make money until I'm 75.