Dow Averaging 3% Since 2000

Recent headlines make you believe that the market has been doing exceptional, and it is had a nice run recently, but let's get real.  The Dow Jones industrial average (NYSE:DIA) has barely increased by 3% annually on average since January 1, 2000, and that beats the S&P 500 (NYSE:SPY) and NASDAQ (NYSE:QQQ) handily.  In addition, if current sentiment has anything to do with it, another major peak may be on the horizon.

Smaller investors are greedier today than they have been in quite a long time.  My business is one that is constantly monitoring these smaller investors, be it through their responses through social media, traditional media outlets, market based financial articles, television, or through the real time trading reports that we publish for individual stocks, and in keeping my finger on the pulse of these smaller investors I often find contrarian indicators that are actionable from time to time. 

This might be one of those times.

The epitome might be a conversation I had with one of my best friends, who said real estate would never fall again.  Clearly, the sentiment on the street is not limited to the stock market, it is based on asset price increases from virtually all asset classes, but my primary business is the stock market, and as stock market investors come across my plate I find that every one of them, with the exception of a very small niche, are actually expecting to get 15 or 20% a year from their stock market investments.

To anyone experienced in this industry, that's an eye opener.  The Dow Jones industrial average is up only 17% since September, 2007 (that all came last year), and it is up only 43% since January 1, 2000 (when I started stock traders daily).  Said another way, the Dow Jones industrial average has averaged about 3% a year since the turn of the millennium, plus dividends of course.

During that time it has had its share of collapses and recoveries, and a resounding similarity occurs after every recovery.  Somewhere near the peak, smaller investors begin to get extremely greedy.  They become overly confident, and they start to throw caution to the wind.  On the other side of the coin, when everything looks ugly, smaller investors get defensive, but in each case that is almost exactly the opposite of what they should be doing.  When everything is ugly, investors should be aggressive and taking positions to buy the market, and when the market is at relative peaks and everyone else is greedy, prudent investors should become defensive.

Given what I know about today's environment, the greedy sentiment on the street today is very similar to the over exuberance that I have been witness to many times during the life span of my business.  The boom and bust cycles are almost predicated on sentiment sometimes, and if that is true this time we will soon see a peak in the market that will last for quite awhile.