the dancing dow and its long-term history

The Dow Jones Industrial Average is probably the oldest stock market index with more than 100 years of history behind it. The history is here:

In 1900 the Dow was just below 70 and now in April 2013 it is 14700. The table shows some facts:

It is evident that the Dow survived the uncertain world: The great depression of 1929, two world wars, the 1973 oil crisis, the cold war, the black Monday of October 1987 (22% fall on a single day), the dot-com bubble, the 2008 financial crisis, and the current economic recession.

Despite all odds, the Dow has marched on. Its 80-year return is about 6% annualized. However, the last 6-year period return since April 2007 is about 1.5%. Probably, its worst 20-year return is for the period from Jan-1965 (889 points) to Jan-1981 (822 points). Talk of long-term investing. Index buyers would have faced some terrible times there. 

The real American growth story began after 1981. Look at the graph. This must have created many a millionaire. 

So what causes the rise or the fall of the index besides the human (rather bad) behavior? Simple to answer but difficult to predict. It is the cash flows (earning power) of the firms. These cash flows are a factor of their growth rate and the riskiness. If growth rate goes up and interest rate goes down, it is good; vice versa is very bad.

The riskiness of cash flows is affected by the prevailing interest rates. As interest rates change practically the value of all assets with cash flows change. 

Have a look at the interest rate history in the US.

Interest rates touched 20% during 1980-82 period. The two decades that ended in 1982 experienced one of the highest interest rate periods in the history. Just as of now, it is facing one of the lowest rates  in the history.  What do you expect the index to do during these high interest times? It promptly fell in the absence of any meaningful growth in cash flows probably. 

What's in store now? The current global recession, the European crisis, the Euro mess, the Japanese regression, and the unstable BRIC markets - where do we go? 

The US may not be the best market in isolation; but if you consider what's happening around the globe, it is still probably the most enduring markets to consider.

At least in the American context, picking the right stocks could help; if not, low interest rates should help the Dow rise from here (take the next decade) until we see significant increase in the rates, of course, subject to a reasonable growth rate in the cash flows of the firms. 

Passive investing should offer some help for those who are wary of stock picking.