Dow 20,000 Conundrum: Why Markets are Destined to Drop

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The Dow 20,000 conundrum dates to the 1990’s just before the Tech Bubble burst, when all indicators and experts pointed to a record breaking 20,000 points, but that prediction never came true.

All market action being a byproduct of human psychology will make 20,000 a key resistance point for numerous reasons. One, nobody is willing to take a risk under current conditions. Two, American political changes associated with the Trump transition yield uncertainty, to which markets will likely not respond well. Three, it has been longer than average since the last major recession. Finally, the Dow will not break the key resistance point because of the simple basis of the market, mass psychology.

Current Market Conditions

Through 2016, several major things happened, including Brexit, and a major shift in Chinese economic policies.

Though the Brexit effect is an obvious one, tanking the markets, there was a quick rebound. But in what world does this make sense? The world’s 5th largest economy, using any sort of logic, should not be able to lose the majority of its EU based international trade agreements without any market repercussions. This is indicative of the market’s misassumption of the future impact of the loss of these agreements.

Other issues include the slowdown of the Chinese economy. Now undergoing another bout of market reform, the world’s second largest economy is facing high levels of uncertainty.

Trump Transition

Though this could fit under market conditions, as Trump takes the White House, rapid market changes can be expected for numerous reasons.

Firstly, Trump’s policy is that of protectionism, trying to lash out and protect the manufacturing jobs that remain. Never in modern history has this worked. During the Great Depression it led to higher prices and a tariff war which only worsened the global economy. Should such a policy be implemented, cheap foreign goods which have allowed Americans to consume more, despite rising inequality, will disappear. To be “Made in America” is not a possibility in the modern global economy.

Take if you will an example from Mike Catherwood, the co-host of the radio advice show Loveline (1):

Take the classic “Born in the USA” outfit: blue jeans, white T-shirt, work boots. The three items, all USA-made, cost $421: domestic-made Levi’s 501s ($178), American Apparel white T-shirt ($18) and classic Red Wing work boots ($225). The same outfit with imported goods is far cheaper: Brahma-brand work boots from Walmart ($33), a white Hanes T-shirt ($6) and Gap classic blue jeans ($60) add up to cost less than $100.

This, combined with worsening income inequality do not bode well. There is no bringing back manufacturing jobs. It is no longer possible.

Rather than accept that the US is not a manufacturer, time, energy, and focus will be directed towards the retention of lower quality, lower paying jobs. The United States is an informational power, not a manufacturing power. This will not be the case during the next presidency, driving down future outlooks.

Cyclic Markets and The Next Recession

Naturally, markets’ boom and bust, going from overbought, to oversold. Since 1854, the average boom lasted 38.7 months, just over 3 years. The average bust lasted 17.5 months.

The most recent boom is running on its 82nd week. What justification does the market have to keep going up?

There is the uncertainty between: The Trump Transition, an OPEC oil grip, US-Russo tension, both in cyberspace and Syria; and Brexit.

Psychology

Prominent investors predicted to hit 20,000 since the tech bubble, running to publish books, but it never came.

The market does not run up forever, it stumbles along the way both due to market factors, but more importantly, mass psychology.

A paper published in 1993 (2), written by R. Glen Donaldson and Harold Y. Kim attempted to either confirm or disprove the existence of price barriers. According to their abstract:

It is found that the DJIA’s rises and falls are indeed restrained by “support” and “resistance” levels at multitudes of 100 but that, having broken through a 100-level, the DJIA then moves by more than otherwise warranted.

Time will tell, but the markets have no reason to hit the 20,000 mark, especially not with the current resistance point hold.

Works Cited:

  1. http://www.huffingtonpost.com/2012/09/17/made-in-america-the-luxury-label-will-cost-you_n_1891127.html
  2. https://www.jstor.org/stable/2331416?seq=1#page_scan_tab_contents

 

 

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