Dow Jones 1929 Correlation Current Dow Jones

Investors trading the Dow Jones at 14000 in October 2008, were seen exchanging the Index for money, or the other way round money for the Index at below 7000 in October 2009, If we keep a track of Dow Jones Index from 1980 to 2008, this was the biggest negative return the Index gave to the investors in the close to 3 decades between 1980 to 2008, but the losses the investors digested in Dow Jones Index were comparatively less compared to the losses the Investors holding ETF’s of Emerging Markets had to digest, for e.g. The Sensex which stood at 21000 in January 2008, the investors exchanged money for the Index at below 8000 in Oct 2008, and if currency is taken into consideration then the loss was even for magnified as while 38 Rupees were equivalent to 1 Dollar in January 2009, the investors by Oct 2009 felt that 50 Rupees should be paid to buy a 1 Dollar worth Investment. This meant that the Sensex gave 70% negative return on investment, but still the losses made by the investors having there investments placed in stock markets could not outpace the Great Depression period losses, As during the Great Depression period the Investments made in Dow Jones Index saw loosing close to 90% of there value in more than 2 years between 1930 to mid 1932.

Now here starts our real topic, after the initial crash the Dow traced back more than 50% of its loss and then onwards the investors not owning the index could not pile up the cash or were hoarding cash instead of the Dow Jones Index, at the same time the Government policies at that time might have given the investors already invested in the Dow the willpower to hold the investment, as the investment would cut down losses and create profits, so what if the investment comes cost to cost 25 years latter. The Dow Jones traded narrowly for the next 15 years an could break past the initial cost of investment made in 1930 only 25 years latter in 1930.

Now how is the current situation comparable to 1929, If we make some adjustments then it is, Dow Jones has been trading in a narrow range for the period between 2000 to 2006, The investors who had invested in 2000 saw some profits on investment by 2007, but those who didn’t book profits by 2008 end, and then did not wish to exchange cash for index till they saw 14000 again are still holding the investments, so if we consider 2007 end as 1929, early 2009 as 1932, then by 2025 the Dow Jones could break past 14000 and it could be the time to trade between 10 to 11K for 5 years and other 10 years between 6.6K to 10K.

Correlation between Stock Market and Currency

I had mentioned in my earlier post http://niftywhatcanhappen.blogspot.com/2009/11/stock-market-and-currency-movement.html that we would analyze how Deflation in Japan had an effect on the Japanese Currency Yen, so here it is.

The Japanese Nikkei traded at 2000 in 1971, at that time 30 Japanese Yen sufficed to buy 1 US Dollar, by 1990 the Japanese Nikkei went to trade at 40,000 but now you must be expecting that the 30 Japanese Yen invested could buy more than 1 US Dollar, contrary 158 Japanese Yen were required to buy 1 US Dollar, that means the theory that strong growth lead to strong returns on investment in stock markets which leads to strong currency are completely wrong, as when the Japanese stock market gave 2000% return on investment in the period between 1970 to 1990 for an foreign investor, the Japanese yen cut 500% from that investment, now when the Japanese Nikkei reached its life time high in 1990, the Japanese Yen too reached its lowest against the Dollar in 1990, When the Nikkei went on to trade at 15000 in 1994 i.e when it was losing more than 50% of its lifetime high, 84 Japanese Yen were enough to buy 1 US Dollar, i.e while the Nikkei was losing value, the appreciation in Japanese Yen saw to it that a foreign investor was loosing money at a smaller pace than the domestic investor, Cut to 2008 – 2009 when most of the Emerging Market Currencies are loosing there value against the US Dollar while the Stock Markets are appreciating, It is the Japanese Yen which has reached its 15 year high against the US Dollar while the Nikkei is taking drubbing.

Now let’s see the correlation between the Dow Jones with the US Dollar and Nikkei with the Yen. Dow Jones traded at close to 1000 in 1970 and by 1990 it traded at just 3000. But while the local investors in Japan can say that there Stock index gave more return on investment then their counterparts in United States (well that might also not stand true if real inflation adjusted return on investment is taken into consideration) this doesn’t stand true for the foreign investors because while in 1970 close to 70 US Dollars needed to be invested to buy 1 Japanese Nikkei (70*30 = 2000, the value of Nikkei), in 1990’s the number of US Dollars invested to buy 1 Japanese Nikkei stood at 250 (250*160 = 40,000) i.e in Dollar terms the Japanese Nikkei just appreciated 300% same as the US Dow Jones, so from an US investor perspective the return on investment which the Japanese Nikkei gave was the same as the Dow Jones in his own local markets was giving. Thus an investor doesn’t earn more money in investing in foreign assets as even if the foreign assets appreciate more than the local assets the inflation in the foreign country sees to it that the currency depreciates against the home country currency.