(1) On May 26, 1896, the Dow Jones Industrial Average was calculated for the first time and closed at 40.94. Effectively, 116 years later, on July 20 it closed at 12,822.57, which works out to almost precisely 5.1% annual nominal gains in the index. It was estimated that the dollar-denominated purchasing power has eroded at an annual pace of 2.77% since May of 1896, meaning that, roughly, the Dow stocks have averaged about 2.3% discrete annual real gains for 116 years! It should be said that back-testing of the S&P 500 Index to May of 1789 confirms much the same result, as the nominal gain in the (artificially constructed) S&P over 223 years is just shy of 3.6%, and real gains in the 2% range.
Borne of good policies sustained over time, the Dow has shown periods of strong growth. That is to say, there is a direct and high correlation between periods of strong gains in equity prices and a macroeconomic policy mix conducive to investment and output growth. The twenty year period after World War II, and the 1980s-90s were long periods of gains for stocks alongside periods of strong investment.
This is the dagger pointed at our economy today: investment peaked in 2006 and is still well below long term trend. Observations of these two points lead us to conclude that U.S. equities have a ceiling placed over them at the moment: GDP output in the U.S. does appear to be headed toward a long period into the future of a “new normal” of lower growth.