Dow - Geometrically Speaking

How long does it take to double your money in the market? The number of ways to calculate that answer is dependent on the complexity involved. Which index is valid? Do you add dividend yield? Do you discount it by relevant risk-free rates to calculate a real return?

The numbers are revealing enough without any complexity factored in, so this analysis is going to use the nominal values of a market index. In this case the venerable Dow Jones Industrial Average (DJIA) will be used and it doesn't take long to do some spreadsheet analysis and determine the answer to the "how long does it take to double your money" question is an average of 10 years. That's a Compounded Annual Growth Rate (CAGR) of 7.2%.

It's the segmentation over history that makes this analysis interesting, and it's also a great way to come to an opinion of where we are today.

Working strictly with milestones of even 1,000's on the DJIA index, it will become apparent that the doubling effect every 10 years is an average that has had significant variance.

First segment of interest was the time it took for the DJIA to travel from 500 to 1000.

500-1000) Mar 1956 to Nov 1972, or 16.7 years. CAGR = 4.2%

This first segment spanned Eisenhower's first term with the re-elected Nixon. This analysis is not assigning performance to presidents, but it's a convenient way to think of eras.

The poor performance could be attributed to the market crest in 1966. The market hit 989 in February of 1966, but it took another 6-plus years to see a week close over 1000 on the DJIA. Had the market reached that milestone in February 1966, then the average of doubling every ten years would have been achieved, almost exactly.

Next doubling:

1000-2000) Nov 1972 to Jan 1987, or 14.2 years. CAGR = 5.0%

This segment ran from Nixon to Reagan. The 1966-1982 bear market played a major role in each of these first two segments, but together they represent a lot of time where investors were suffering over long ranges of time. Recall that we could have nearly had a Dow 1000 in 1966, which would have made this period 21 years, instead of 14.

Next doubling:

2000-4000) Jan 1987 to Feb 1995, or 8.1 years. CAGR = 8.9%

This segment ran from Reagan to Clinton and the investor would had to endure the crash of 1987, but eventually they would have been rewarded with an above average return.

Next doubling:

4000-8000) Feb 1995 to Jul 1997, or 2.4 years. CAGR = 33.6%

This segment was one for the history books. This Clinton era bull market was similar to Barry Bonds hitting 73 home runs. It's not likely going to happen again. Apply your own analogy to the Greenspan-put and steroids.

Next doubling:

8000-16000) Jul 1997 to Nov 2013, or 16.4 years. CAGR = 4.3%

This segment has come full circle to the 1956-1972 period. From Clinton to Obama this period saw the end of the Tech Boom, then the recession of 2001-2002, and the near depression of 2008-2009; with each pause followed by a strong recovery. To return to a sports analogy, this was a Barry Sanders run where he got tackled eventually near the line of scrimmage - after darting sideline to sideline.

So does 2013 look like 1972 after taking its sweet time to produce a double? Another, more recent segmentation would make it appear that we aren't past the molasses stage yet.

9000-18000) Apr 1998 to Dec 2014, or 16.7 years. CAGR = 4.2%

Now the comparison to 1972 is spot-on arriving at the same duration and CAGR. That takes us through 2014 - what about now? The Dow got within a whisker of 20000 on the President-elect Trump rally at the end of 2016.

10000-19934) Apr 1999 to Dec 2016, or 17.7 years. CAGR = 3.9%

Now to those that believe we are in another extended market, one could respond that they just waited for their 1999 investments to double, do they have to wait even longer in the near-future? It is possible since the sluggish period of 1956-1972 was followed by another similar sluggish period from 1972-1987. That was 31 years in duration to achieve a quadruple, or a 4.5% CAGR performance.

 The post-Tech Boom period has every good reason to be followed with a long period of under-performance. That boom was a massive bubble that rivaled the great bubbles in history. That was a boom in the stock market and it cannot be ignored that a bigger bubble in the housing market popped in 2008. Along with that came a bubble and popping in the commodity and energy markets. The Housing and Commodity bubble do not necessarily depress stocks but they both robbed the investor of liquidity to reinvest in stocks.

A future segmentation could look like this:

8000-32000) Jul 1997 to June 2028, or 31 years. CAGR = 4.6%

It has been demonstrated that long periods of 4.5% returns have their own intra-period variance (Barry Sanders runs). Yields and discounting were left out of the analysis - but in a broad-stroke analysis they would have made the variances even greater. The low returns of the 1970s and early 1980s were compounded by high interest rates. The investor broke even from 1966 to 1981 nominally, but lost purchasing power to inflation and missed a risk-free alternative of double digit returns. The high-return period in the Clinton area were even better, considering a low interest-rate environment.

The bad news is that "Dow 32000" could be in the face of risk-free returns that double the market returns. What could provide a quicker double looking forward?

Short Bond positions (TLT is an ETF that tracks with long-dated treasuries).

When a Favorite Falls from Grace

One may think of Apple (AAPL) and Chipotle (CMG) as stocks, and companies, that have little in common.     But the one major theme that binds them is that they were favorites.  In 2012 their respective stocks were favored at times showing considerable relative strength to the general market.  Chipotle was propelled to $440 per share in April 2012, a 57% gain over the year earlier.  Apple saw its high-water mark five months later when it closed at $702 per share; that represented a 71% gain in a year's time.

Click on Image for Full Screen View -------------------

Setting each stock on a 100-point index, at their highest point makes for an interesting comparison.

There have been 96 trading days since Apple crested at $702, as it closed today (Feb. 7, 2013) at $468, that puts the Apple Index at 66.69.  That compares incredibly similar to Chipotle's 96th trading day when it measured 66.77 on its 100-point scale.

Their methods to sell of one-third of their valuation have not been alike.  The graph above shows the Apple decline much more linear while Chipotle has had more volatility.

Given the five month head start Chipotle has on its meltdown, it now can provide a five month forward-looking rebound for Apple shareholders.  Chipotle incurred a wide range of prices after its first 96 days of correction.  It would imply of range for Apple of $380-$555 if Apple experienced the same type of volatility.  If Apple skips the drama and find a bottom in the next 40 trading days, then it could be expected to start trending its way about 70 on the index.  That would mean a price near $500 in July 2013; not significantly higher than it is today, but when and where the bottom is put in will be the interesting story.

The similar nature in the way the companies delight their customers, have executed well and are on solid financial footing seems to lend credence in watching Chipotle to predict what Apple might encounter.