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: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...
Post a Comment
Read more

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...
Post a Comment
Read more

Sound Advice: January 15, 2025

Why investors shouldn't pay attention to Wall Street forecasts   Investors shouldn't pay attention to Wall Street forecasts for several compelling reasons: Poor accuracy Wall Street forecasts have a terrible track record of accuracy. Studies show that their predictions are often no better than random chance, with accuracy rates as low as 47%   Some prominent analysts even perform worse, with accuracy ratings as low as 35% Consistent overestimation Analysts consistently overestimate earnings growth, predicting 10-12%                 annual growth when the reality is closer to 6%.   This overoptimism can                 lead investors to make overly aggressive bets in the market. Inability to predict unpredictable events The stock market is influenced by numerous unpredictable factors, including geopolitical events, technological changes, and company-specific news.   Anal...
Post a Comment
Read more