In 1999, two journalists wrote a book titled Dow 36,000. At the time, the Dow Jones Industrial Average was a measure of the price performance of the New York Stock Exchange. At the time, the Dow was at 8,800. In 1994, it had been 3,400. Two years later, the Dow was still rising and Federal Reserve Chairman Alan Greenspan worried in public about “irrational exuberance.”
Many thought: “Not in my lifetime!”
As I write this, the Dow is at 35,112.
The Dow closed higher than 36,000 for the first time on November 2, 2021.
Does this mean that capitalism really works as promised – creating the wealth of nations? What happened?
Time and low interest rates.
Time makes it possible for compounding returns to take effect. Here is a compound interest chart:
![](https://i0.wp.com/mcusercontent.com/1a250af7608b18d124aa983a8/images/8327e732-380e-4690-e4d8-9cfa644402c4.jpg?resize=340%2C213&ssl=1)
The higher the return and the longer the time the investment is left also to grow, the more dramatic the total return.
Secondly, low interest rates. For various reasons, governments have put trillions of dollars in both the U.S. and the global economies since the late 1990s. More money, lower interest rates.
Then, earnings on stocks (dividends and buybacks) and expectations of continued entity profitability outpace what can be earned in interest by investing in debt instruments. So, rational investors put their money in stocks and keep it there. The Dow just keeps on rising, day in and day out.
Now, importantly, wealth makes for differences in marginal utility of an additional dollar and in the consequences of risk. Wealthy people have a lower marginal utility for each dollar they own and so can tolerate risk better. They can put money away for the long-term in more risky investments and so earn the higher returns that go with higher risk and, thus, get more in compounding returns on their equity investments.
Poor people need to be more prudent and not take long-term risks. They also don’t have much money to use for investments after their consumption expenditures. They are systemically limited in being able to benefit from long-term stock investments.
A particular stock is more risky in the short and medium-term that if held for years and years. Risk-averse investors should stay away from long-term bets on equity ownership.
Secondly, the liquidity provided by governments and central banks tends to flow to the wealthy. They, in turn, have more income than they consume, so they are systemically more able to save and to keep their savings untouched.
Thirdly, the rise of huge investment funds have lowered risks for stock ownership. The big funds diversify risk by investing in many, many companies. Thus, they have provided a safer haven for money invested in equities, which pay more than bonds and other debt contracts. This has attracted money into equity investments.
These economic realities have kept financial markets growing and growing for 25 years. Here is a chart on the Dow’s performance:
![](https://i0.wp.com/mcusercontent.com/1a250af7608b18d124aa983a8/images/3aa2a6b7-1289-9ca6-59f0-966104545883.jpg?resize=340%2C245&ssl=1)
![](https://i0.wp.com/mcusercontent.com/1a250af7608b18d124aa983a8/images/0d8e97e9-3bdb-1799-4b2a-0af5f1d8d191.png?resize=380%2C198&ssl=1)