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Speaking of inflation (or deflation), it has been 8 months since we looked at the inflation adjusted chart of the Dow Jones:
We’ve had a sharp bounce, but when we step back and take a really long term view, we are still in the middle of a very wide upward sloping trading range. You might recall that during the really dark hours of the bear market in late 2008 and early 2009 there were more than a few calls of Dow 5,000 as a downside target. In the aftermath of the 1920’s bull market we fell down to the lower edge of the range very, very fast. During the aftermath of the 1960’s bull market it took much longer.
I think we are still in a long term secular bear market according to the 18 year cycle of the stock market. But honestly, I have no idea how we are going to get to the lower ledge - if at all. If we’re honest about it, no “guru” knows this either. The most reasonable explanation would be a protracted trading range that would see prices move sideways. Especially as they are eroded slowly by inflation. That level is also support from a horizontal resistance/support line which lies at the top of the 1920 and 1960 bull market tops.
Also, the Dow is trading 57% higher from its low in March 2009. That is slightly more than what the inflation-adjusted Dow gained from its 1966 peak to today (54%). And from an inflation adjusted point of view, the Dow has only managed to double in price from the 1929 top. It is easy to lose sight of the big picture when we are so engrossed in the day to day minutia of the market movements and news. That’s why it is so vital to have a bird’s eye view every once in a while to get some perspective.
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