In 1999, James K. Glassman, a syndicated columnist, and Kevin A. Hassett, an economist, published a book entitled Dow 36,000: The New Strategy For Profiting From The Coming Rise in the Stock Market. The authors’ thesis was that stocks were significantly undervalued. What’s more, they projected a quadrupling of the Dow Jones Industrial Average within three to five years: 2002 to 2004.
They couldn’t have been more wrong. The Dow index peaked just above 11,700 in early 2000, then dropped below 7,700 in September 2002, just prior to the time Glassman and Hassett had forecast their 36,000 target.
In 2007, the Dow climbed back to 14,000, then plunged in half by March, 2009.
What went wrong?
The authors’ argued that investors viewed dividends from stocks as significantly riskier than they should have. Based upon a reduced risk view of dividends, they suggested that valuations should be based on a multiple about six times the historical rate of 15-18 times earnings.
Their valuation premise was far beyond the limits of reality and their other assumptions, such as those for interest rates, were equally faulty. More than two decades later, however, we are now in striking distance of 36,000. That looks like a big number, but even bigger numbers lie ahead.
We can begin by assuming a constant level of valuation, but even if stock values pull back within a normal range, a Dow in the area of 100,000 might well be a possibility 20 years from now. It would take no more than a 5% gain in the index to reach that level. Such a projection would require a combination of corporate earnings growth and inflation totaling 5% a year.
That’s probably conservative. Over time, stocks have generated annual gains on the order of 10%, so even if we have a less ambitious expectation and look for growth of only 7% a year, the 100,000 Dow would be 15 years away.
To be sure, stocks fluctuate in a broad range, but the long view underscores the likelihood that stocks will continue to provide the highest returns of any asset class.
N. Russell Wayne, CFP®
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