Seeking Guidance for the Dow? Try GDP

Abstract

With recent market volatility, investors are understandably concerned about where blue-chip stocks are headed next. An interesting long-term perspective on the subject can be gained by examining the extent to which Nominal Gross Domestic Product has explained the movement of share prices, in particular, the Dow Jones Industrial Average, over time. In this report, we look at the relationship between the two metrics since 1916, updated with data through the second quarter, 2007. We find strong support for the Dow to be trading in the vicinity of 13,700 to 14,000. The authors appreciate the assistance provided by HyungSuk Choi.