Market heal thyself! - Part 1

I'm going to make things fun. Today, I have some graphs for you to look at (ooh, pictures!). They are graphs showing the tech bubble in the stock market as it formed and then burst nearly 10 years ago, followed by the real estate bubble forming and bursting.

First, though, understand that I recognize that the basis of my analysis here is extremely elementary, and completely lacks any consideration of the many facets of the economic conditions surrounding the dot-com bust, or the more recent collapse in real estate prices. The graphs and my purpose for them is merely an exercise in common sense, and devoid of any sophistication. Value it as you may.

First the Dow Jones Industrial Average from 1985 to the present (my apologies for the poor quality):



The red line is nothing statistical or algorithmic; it is just a straight red line that I drew to match what I saw as a fairly steady upward trend in the DJIA index in the first 10 years. As you can see, around 1995, the tech bubble begins to inflate. It continues until around 2000 and 9/11/2001, when we have that big turndown, then the market picks back up again, yet still above the long term trendline.

Notice that the red line meets the DJIA value again pretty much today, around an 8000-point value. Many a market watcher have claimed that 7500-8000 is the bottom of this bear market. Is it just coincidence that is the value predicted by the long-term even-growth trend line?

Moving now to the real estate market, and U.S. median home prices, with a bit longer timeframe:



Two data sets are on this chart (mostly it's because it's the first one I found). The first data set shows non-inflation-adjusted home prices (blue line) and the second shows those same prices adjusted for inflation (I don't know where the par value is for these).

Notice, again, the fairly steady rise in value for each of these graphs, followed by a strong deviation from that trend in the late 1990s. I drew red and blue lines to show my own, eyeballed, trendline, discounting the anomoly starting in the late '90s.

It is somewhat interesting, though not at all statistically significant, that both of my superimposed trendlines almost intersect at the same point on the chart. I would expect them to intersect at some point, since inflation is typically positive and so one will always be outpacing the other, but it's likely just coincidence that they come to that nexus near our present-day levels.

But what is the point of all this? Why do I put these graphs up here? If it is not obvious already, these graphs clearly show what has been called the tech bubble and the real estate bubble. Both are glaring short-term deviations from the trendline in values. And what do bubbles do, almost inevitably? They pop. And so they did here, too, sending both stock and home values plummeting back to where they should have been trending to all along.

More in Part 2.