Skip to main content

Sound Advice: July 14, 2021

Dow 100,000

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®

Any questions? Please contact me at nrwayne@soundasset.com


Comments

Post a Comment

Popular posts from this blog

Sound Advice: September 21, 2022

The Professional Approach To Stock Selection There are various approaches to stock selection, but the two that predominate are fundamental analysis and technical analysis.  Fundamental analysis is a numbers-based method that evaluates key factors such as income and financial health, including the past, present, and future.  Technical analysis emphasizes movements and formations of stock prices. Fundamental analysis is based on factors that over time have proved to have a meaningful impact on stock price movements.  The optimal picture of corporate profitability is steady growth, both in the past and, prospectively, in the coming years.  Steady growth is rewarded by higher valuations of underlying earning power than those accorded companies with erratic progress. When professionals screen (filter) the data of the broad universe of stocks, they look for companies that move ahead every year, regardless of the prevailing economic conditions.  Although high pas...
Post a Comment
Read more

Sound Advice: July 26, 2023

Is Day Trading a Good Idea? Day trading can be both exciting and potentially profitable, but it also comes with significant risks and challenges. Whether it's a good idea depends on several factors, including your financial situation, risk tolerance, time commitment, and knowledge of the markets. Here are some considerations to keep in mind: Risk and volatility: Day trading involves buying and selling securities within a short time frame, often within the same day. This exposes you to the inherent volatility and risks of the market. Prices can fluctuate rapidly, and unexpected events can have a significant impact on stock prices, making it challenging to consistently make profits. Time commitment: Day trading requires a substantial time commitment. It involves closely monitoring market movements, conducting research, and executing trades. It can be stressful and demanding, as you need to be actively engaged in the market during t...
Post a Comment
Read more

Sound Advice: May 31, 2023

High Yields, Yes!  But There Are Risks Now that failure to get much done in Washington seems to be the bottom line for lots of talk, but little action, it’s hard not to wonder whether we’re missing something.  Yes, the Federal Reserve Board has aggressively raised interest rates in the hope of putting a damper on excessively high inflation, but one would think that there might be some good news as a result of these efforts. The hoped-for result is that inflation is indeed moderating.  Also of importance, though, is the sharp improvement in interest rates on fixed-income investments, usually a.k.a. bonds.  For much of the past decade or more, interest rates have languished at or near historical lows, which created considerable shortfalls for folks living on fixed incomes. Thanks to the Fed’s hikes, the returns on bonds and the like are beginning to be of interest.  But . . . and that’s a big but . . . there are risks involved. For short-term investing at ...
Post a Comment
Read more