Here's a number-sequence question like the ones found on student intelligence tests, or aptitude tests, as educators like to call them.
Complete this progression: 94, 73, 119, 74, 142, 64 __, __.
I don't know the answer to this one--it's beyond either my intelligence or my aptitude. But I do see three higher numbers (94,119,142) separated by three lower ones (73,74,64). The highs are getting higher, but by a lower percentage each time. So maybe the next number is around 160. The lows are more confusing. Why is the last one so much lower than the first two?
These are stock market numbers. Each is an intraday peak or trough in the Dow Jones Industrial Average, with the last two digits chopped off. Here are the full numbers with dates:
9,412--Jul. 12, 1998 7,379--Sep. 1, 1998 11,908--Jan, 14, 2000 7,489--Jul. 24, 2002 14,279--Oct. 11, 2007 6,440--Mar. 9, 2009
I'm not a numerologist, chartist or conspiracy theorist, and I only read half of "The Da Vinci Code." However, there's a clear story in the above numbers. The market has produced increasingly impressive rallies in recent years, and all of them have proved illusory, with the last ending in a tumble that dwarfed the ones before it.
That makes me wonder if the Dow is about to shoot up to, say, 16,000 â?? and then plummet closer to 6,000.
I know: Market movements are supposed to be based on fundamental measures of value like earnings and dividends, not on whimsy or patterns. However, given that companies that were reporting negative profits just two years ago are now boasting record earnings, it's impossible for investors to see earnings as a reliable measure. And dividends just aren't the main attraction they used to be. The U.S. market has yielded an average of just 2% over the past two decades, down from an average of 5% over the previous 180 years, yet investors keep buying. Also, America's central bank has left core interest rates near zero for two years, making puny yields deceptively attractive by comparison.
The point of this year-end market forecast is that traditional signals of value aren't serving investors well at the moment â?? which makes it especially hard to trust year-end market forecasts. Don't put too much money in stocks because the current rally might be just another cycle in the above sequence. Don't put too little in, either, because someone surely wrote something similar to this in December 1982, when the Dow, after rising above and dipping below 1,000 several times over the prior decade, rose above it for good on its way to one of the biggest rallies in history.
If you, like many investors, have grown weary of these cycles, but you're not quite ready to fill a bunker with gold and freeze-dried food as the doomsayers advise, let me offer an off-the-beaten-path recommendation for a portion of your stock money: Start a business. Labor and commercial space are abundant and cheap, consumer spending is decent and local governments will hold a ticker-tape parade for anyone who can create six jobs. Small businesses provide almost everything that's good about stocks, like the ability to grow wealth faster than inflation, without some of the things that investors would rather do without, like flash crashes. The opportunity costs seem low right now, which is to say entrepreneurs won't miss out on a hot job market with their time or bargain-of-a-lifetime investment prices with their money.
A few new entrepreneurs might even end up making that most lucrative of stock transactions--the kind where prospering businesses create new shares to sell to a profit-hungry public.
Jack Hough is an associate editor at SmartMoney.com and author of "Your Next Great Stock."
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