The Perspective of a Starting Point is Critical

On March 9, 2009 the price of the DJIA closed at 6,547. Using that as the starting point of this bull market it is understandable why nervousness abounds with the price today up 220% at 20,941, with no improvement of a corresponding magnitude in the fundamentals. However, it can be argued that the post-Lehman collapse was greatly overdone.

From the perspective of the pre-Lehman peak of 14,165 on October 9, 2007, the last time that the price was vaguely in equilibrium with the dividend discount value, the price of the DJIA has risen by only 48% or 4.3% per annum, a much more tempered pace.

Over the same period the dividend of the DJIA has risen by 68% while the yield on the 30 year T bond has fallen from 4.87% to 2.95% pushing up the price of the bond up 65%.

Dividends Up, Bonds Up, Raising Dividend Discount Value to 38,172

At 38,172 the dividend discount value of the DJIA remains at a substantial premium to its price of 20,941. Thus the pressure on the DJIA price remains decidedly up which should continue a considerable time.

The dividend discount value of the DJIA is function of two main vectors, the aggregate dividend of its constituents and the yield of the U.S. 30 year T Bond.

Since October 9, 2007, the dividend of the DJIA has risen 1.68 times from $290.37 to a record $487.47 while the yield of the T Bond yield has fallen from 4.87% to 2.95% resulting in a 1.65 fold increase in the price of the 30 year T bond. The product of which changes is a 2.77 fold increase in the value of the DJIA to 38,172

Comparing the Value of the DJIA with its Price

While previous reports looked at the longer term relation ship between the DJIA price and its value from 1981 to 2017 and showed the high correlation 0.93 between price and value up until Lehman, the chart below is a magnified version of the same chart from 2002 onward.

Although the price of the DJIA has yet to match its value post Lehman, the chart demonstrates how the pressure on the price has been continuously upwards towards value. This condition remains and should continue for some considerable time, unless the world wakes up to the extraordinary value available and buys the DJIA.