As you read this post, I hope it will change how you see the world and how you act going forward, as it relates to your financial situation and, therefore, your plans for your future. I have analyzed the stock market drop from the high of 14,280 to the close of markets yesterday Oct. 10th. I also looked at the historical data for the Dow from 1984 with its spectacular rise starting in 1995, dropping in 2000 after the Dot.com bust, rising again from that bottom after Sept. 11, 2001 and rising to its high ending in the Fall of 2007. Here's what the future looks like to me. It isn't cast in stone, but there are enough unique conditions that it is going to have a dramatic affect on how we live, and how we accumulate wealth to secure our future.
The first conclusion I have made is that the market trend in the Dow from 1988 to 1995 will be the dominant trend in markets, after bottoming soon at a Dow of about 7,200 to 7,400. What this means to you is that the Dow will NOT return to its high of 14,000 till the year 2030. That's right 2030! This is unfathomable for most Americans to even consider. Can things change to arrive there sooner? Yes, but built into this view is a continually rising Dow. We know that there will be setbacks during that period. But there will be an end to the excesses that got us into this trouble in the first place, and a generation who won't forget what has happened in their lifetimes. Sorry for that gloomy outlook, but read on, as there is hope.
The rate of growth in the Dow between 1985 and 1995 was about double, when it went from about 2,000 to 4,000 points. From 1996 to 2000, the Dow's rate of growth was from 4,000 to 12,000, or a tripling. In effect, from the year 2000 to now, the Dow rose to 14,000, but since has dropped to 8,451 at the close yesterday. That is a drop from the high of 5,500 points, or almost 40%, with still more losses ahead. So the time for triple growth in a short timeframe is almost out of the question.
In summary here's what has occurred with the Dow:
1985-1995 10 years = Doubling of the Dow
1996-2000 5 years = Tripling of the Dow in half the time of the previous 10 years
The slope of the trend line is a predictor of the future trend, until events change. Using this simple fact, if one were to follow the trend of the Dow from 1988, the intersection of that trend line would be around 7,400 on the Dow. That is why I have repeatedly said the Dow will go down to 7,400. We still have about 1,000 points to go if we bottom now, OR, if we just stay at 8,500 level for the period of about a year or so, the trend line will cross at 8,500 and then the Dow will start to rise again. But it will be at a very slow rate compared to what we have grown accustomed to in the past 15 years. This will change our lives and our notions of reality in financial terms. This will affect our savings habits and our spending habits as a country. That is why most experts say we are headed for a deep recession, and some 60%, believe a Depression. Whether we go into a Depression will depend on whether we have learned the lessons we needed to, not at a country leadership level, but rather at the individual person and family level.
2008-2018 Between 7-10 years there will be only a 20% gain in the Dow.
Here are some lessons to learn:Lesson #1.
Live within our means.
Only make purchases when we have the money/cash to pay for them. This means not using Credit Cards unless we can pay the total balance off within 30 days. This means ensuring that we have enough cash set aside to manage any unexpected expenses or for emergencies.Lesson #2.
Save 10% of our income.
Live in a house/apartment where our payments and our home expenses allow us to put aside 10% of our income weekly. This will be used to help save for college for our children, large purchases like a new car or investing in renewable energy sources for our homes. If we can't do this then we are living beyond our means, and may need to increase our income, for example, by taking on another job. Don't expect any money saved will yield high returns any longer, as they won't. See if it is possible to work some days from home. Look at other job possibilities as well.
The days of buying on credit are over. Yes, they will still send us credit cards, but we will need to realize we have been addicted to credit and need to break the "habit".
Investing for the long term will take on new meaning. Buy and hold strategies are gone for now for a long time. Trading will be the name of the game. Investing in Large Caps will not help us realize our financial goals. Small caps are where we have a chance to make some real gains. Large Caps will be merging with other Large Cap companies. Mergers and Acquisitions will be the significant activity over the next 5 years. Layoffs will increase and Small Businesses will be in a state of flux, but creative entrepreneurs will lead us out of this mess. Small is the future and the change to local communities will be where the action is. Video Conferencing will be the preferred method of contact instead of travel. Airlines will be consolidated with some major names going bankrupt, and new names emerging from around the world and serving our air travel. Innovation in Green alternative energy sources will be the space where we emerge as a country and regain our lead in the world.
The gap between the rich and the poor has widened so much over the past 25 years that many on the lowest rungs of society have been forgotten about, and the Middle Class has been nearly decimated. According to a International Tribune article, data from 2007,
the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980.
We will have to relearn to be more compassionate for those who have less, who need a helping hand. Families will, out of necessity, come closer together. It will be both scary and exciting times, but we will emerge stronger and hopefully less arrogant as a people. This time we live in has some great potential for the significant advancement and evolution of human consciousness across the planet.
As Barack has written, do we dare have "The Audacity of Hope"! Let's pray we do. I do!
Labels: class, credit versus cash, Dow, entrepreneurs, financial future, Green, human consciousness, Middle Class