the myth of steady growth

The most oft-repeated nugget of conventional wisdom regarding investing in stocks is that inflation-adjusted values have always increased in the long run. My understanding of the peak oil problem makes me question this conventional wisdom. Our paradigm of long-term growth was founded on data observed on the up-slope of our energy production bell curve and was substantiated (over the long term) by growth during the industrial revolution. Is this paradigm still valid? Without increasing energy, de-industrialization seems the most likely scenario. Without an expanding industrial engine, how can we create the value which our dollars represent?

I just spent some time on trusty wikipedia to learn a bit more about historical stock market performance. The Dow Jones Industrial Average is a widely followed stock market index that began in 1896 as the arithmetic average of the prices of just twelve industrial stocks. Only one of the original twelve, General Electric, is still part of the present-day DJIA, which is now comprised of 30 stocks (still a small segment of the total stock market, but they are large companies that cast a large ripple), the values of which are price-weighted such that the DJIA is no longer just a simple average of stock prices. From 1900 to 2000, the DJIA returned an average APR of 5.3% compounded annually. As is pointed out in the wikipedia article, and is consistent with my own computation, the DJIA will approach 2,000,000 by year 2100 if this growth rate is sustained.

Of course, the average growth of the DJIA during the 20th century gives one the impression that growth was somewhat uniform and boring. This was not the case. If you bought a DJIA index fund in mid-September 1929, you wouldn't get your inflation-adjusted principal back until 1954. Twenty-five years is a long wait just to break even. It's a good thing that retirement savings weren't inextricably tied to stock performance back then (unlike now). If in 1954 you decided to let it ride, you'd see solid returns until 1966, when the post-WWII bull market is recognized to have ended. The growth rate slowed to a crawl for about 20 years. During this prolonged bear market, the DJIA briefly hit 1,000 in 1972, but it was well into the 80s before it hit 2,000. Black Monday in 1987 sapped 22% of the DJIA's valuation, but the index recovered rather quickly and managed to post gains that year. In November 1995, six months after I graduated from high school, the DJIA closed above 5,000 for the first time. By the time I was graduating from college four years later, the index recorded its first 10,000 and 11,000 closes in quick succession. The attacks of 9/11 fucked things up for awhile. In 2002, the DJIA was back under 8,000. The next five years were characterized by unprecedented growth in the DJIA until it crossed into 14,000 territory just a year ago. Today it fell below 10,000 again.

The periods of relatively prolonged growth in the DJIA are:
1. from 1896 to 1914 when WWI and the founding of the Federal Reserve rattled folks.
2. in the late 1920s leading up to the crash of 1929.
3. in the 1950s through 1966.
4. during the 1980s (briefly interrupted in '87) and particularly the tech bubble of 90s.
5. from 2003 to 2007.

During large chunks of time, growth was stagnant at best.

From the early-mid 1980s to the present the pattern of growth as viewed on a time-line is much more vigorous than it has been at any time in the history of the DJIA. In my limited understanding, this has something to do with the proliferation of 401k and IRA retirement plans investing unprecedented sums in the stock market. This provides the market with a steady infusion of capital to both prop up stock prices (lotsa dollars chasing a finite number of investments) and to fund investment in real future growth. Unfortunately, this new system exposes all of us to the down-side of trading stocks.