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Strategies & Market Trends : MARKET INDEX TECHNICAL ANALYSIS - MITA
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To: mishedlo who wrote (15764)1/12/2003 9:24:42 PM
From: Dan Duchardt  Read Replies (1) of 19219
 
Over the long haul stocks return to the mean. Look at a chart of the DOW....., hardly even corrected. The S&P is about 3-4 times bear market bottoms in terms of PE. Everyone thinks this is a "tech problem" and that their stuff is safe.

FWIW, in the long term returning to the mean is returning to the average rate of return, i.e., a linear best fit (regression) on a log plot. It happens that the S&P 500 has completed that trip on a monthly chart going back to 1950 (as far back as I can get from Yahoo data). The average annualized rate of return over that period is 7.27%, and the current mean value is 896. For all the reasons you have mentioned, it could go well below the mean and stay there for a long time as it did starting in about 1973 lasting until 1985 before ramping in front of the "crash" of 1987. Of course the recent data of the bubble has lifted the line higher than it was back in the late 80s to the point where the current line was not broken and held until the mid 90s.

For the Dow going back to 1930 the average rate of return is 6.24% with the current mean at 6236. (The point to point annualized rate of return from January 1950 to now is 7.14%, comparable to the average rate for the S&P.)
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