On this day in economic and financial history:
Ten thousand ... at last! The Dow Jones Industrial Average (DJINDICES:^DJI) finished in five digits for the first time in its history on March 29, 1999, finally clearing a hurdle that had proven too high in recent days, as the market fretted over the profits of the index's blue chips. While IBM had held back the index on its previous efforts at 10,000, it led the March 29 charge to a close of 10,006.78, by posting a 3% gain, despite minimal news.
Optimism reigned on Wall Street that day. Prudential analyst Ralph Acampora told CNNfn that "10,000 is no longer the ceiling. . . I think it's the floor for the market over the next five to 10 years." On PBS NewsHour, financial journalist Gretchen Morgenson noted that Dow 10,000 "reflects the really amazing strength of the U.S. economy. We have had an almost uninterrupted eight-and-a-half years of growth in this country." It certainly seemed that the sky might be the limit in a market that had already doubled in five years, and would become one of the greatest sustained bull market rallies in Dow history. Oil mergers, a strong dollar and, of course, the surging high-tech sector, all contributed to the Dow's rise to 10,000, and would propel it nearly 2,000 points higher before the rally ran out of steam.
However, not everyone was a bull that day. The Wall Street Journal, in an op-ed published the following day, cautioned that "Dow 10,000 could be remembered as a high-point not of investor triumph but of market excess." Over the following decade, this bearish outlook would prove correct. Exactly 10 years later, the Dow was, in fact, more than 20% lower than its close on March 29, 1999, having only days earlier started its rebound from a devastating financial crash that had produced the second sub-five-digit period of that decade.
That decade would result in some ill-considered component swaps, most notably one in the winter of 1999 that added Microsoft and Intel at the height of their dot-com valuations, and the inclusion of Citigroup with that same change as the result of its Glass-Steagall-destroying merger with Travelers. It was a time of tremendous upheaval in the stock market, and the Dow felt the pain of change as acutely as had millions of supposedly conservative portfolios over this "lost decade." The last time the Dow closed below 10,000 points was early June of 2010. Will it fall beneath that mark again? Only time will tell.
The birth of mathematical finance
Louis Bachelier successfully defended his thesis, titled Theorie de la Speculation, on March 29, 1900. The best explanation of this essay's importance to the world of finance was offered a century later by several French mathematicians in honor of the centennial of its defense:
The date March 29, 1900, should be considered as the birthdate of mathematical finance. On that day, a French postgraduate student, Louis Bachelier, successfully defended at the Sorbonne his thesis Theorie de la Speculation. As a work of exceptional merit, strongly supported by Henri Poincare, Bachelier's supervisor, it was published in Annales Scientifiques de l'Ecole Normale Superieure, one of the most influential French scientific journals.
This pioneering analysis of the stock and option markets contains several ideas of enormous value in both finance and probability. In particular, the theory of Brownian motion, one of the most important mathematical discoveries of the twentieth century, was initiated and used for the mathematical modeling of price movements and the evaluation of contingent claims in financial markets.
Unfortunately, Bachelier, who was, in essence, the Fischer Black and Myron Scholes of the French futures markets, received little wider notice in the financial world. His academic career was interrupted by World War I and, following the war, Bachelier's professional rise was curtailed in 1926, when a misinterpretation of his essays led to blackballing at the university of Dijon. Bachelier outlived World War II, as well, but would die in relative obscurity, his pioneering research into random walks and other advanced equity-related mathematical processes largely ignored in his own time.
Out with the old (and ineffective)
The Dow had one other notable component that dramatically underperformed following its 10,000-point milestone. General Motors (NYSE:GM), one of the index's longest-tenured components, was spiraling fast toward bankruptcy, when recently inaugurated President Barack Obama pressured CEO Rick Wagoner to resign on March 29, 2009. This move was largely a symbolic representation of the doomed automaker's restructuring efforts, a good-faith offer to the Obama administration that was set to provide billions in bailouts, on top of billions already committed.
Wagoner's eight-year tenure was, by all measures, an unmitigated failure. During his leadership, GM bled out over $85 billion in losses, cut tens of thousands of jobs, and trimmed production output by roughly a million cars per year. However, the sudden resignation request was met with criticism. Barry Ritholtz, one of the leading economic commentators of the financial crisis, called the Obama administration's inconsistency -- no bank CEOs were pushed out of their corner offices -- "very disappointing." Not only was it disappointing, but the resignation fixed nothing. GM fell into bankruptcy within months of Wagoner's departure. However, the automaker's revolving door of CEOs -- three would take the reins within a year and a half -- has, at least, avoided sinking GM again. So far.