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Dow Falls to 12-Year Low, Amid a Crumbling Economy

By: Steve Johnson

2/20/2009 - 38 Comments

Yesterdays Dow closed at 7,465, lower then the last bear market crash in 2003 when the Dow closed at 7,553.

The last time the Dow closed below 7,465 was 12-years ago on Oct 27, 1997.  Looking at the graph below, this is by far the steepest crash since the Great Depression.  The forces of capitalism cannot be stopped and the stock market will eventually find a bottom, but the damage may take several years to recover from.

Graph showing last time Dow closed below 7,465.

Federal Reserve projects years of economic weakness

It could take years for the nation to fully bounce back from the massive recession, according to new projections by leaders of the Federal Reserve on Wednesday. Fed leaders agreed that unemployment will remain high for the next three years. Some members indicated that more than five to six years would be needed for the economy to converge to a longer-run growth path.

Where is the bottom?

My projection puts the stock market bottom at about 5,500, which hasn't been seem since February 1996.  The following graph is my projection. At this point, many of the banks and several large sectors of the economy will be completely wiped out. On top of that, inflation will come on strong as the trillions of dollars the Fed put into the system begins to flood the market.  

I think the stock market could get to this within the next year, while the economy will probably continue to weaken for another 3-4 years before we see and feel the bottom.  New businesses will be the key to reviving the economy and before they can really start to grow, we need the failing businesses to collapse so that their workers and capital are freed up.  This will spark a wave of new businesses that will grow the economy out of this long recession. 

The sooner we let the old business models fail and the sooner we begin to raise interest rates, the sooner the process of building new businesses can begin. But I don't expect that to happen anytime soon, perhaps not until the next President and congress.  

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