Dow 20000 in 2016, Maybe Again in 2030

Milestones in the Dow Jones industrials such as 20000 must be viewed in the context of valuation

By Spencer Jakab

     A monitor displays numbers for the Dow Jones Industrial Average on the floor of the New York Stock Exchange on Dec. 13. Photo: Getty Images

Big round numbers in the Dow Jones Industrial Average make people feel good, if only because they are an occasion to trot out the smooth and ever-rising 100-year stock market chart. Barring some major change to that long-run pattern, we may be toasting Dow One Million around the year 2094.

Zoom in, though, and the line looks a lot bumpier. The first time the index crossed the 100-point mark back in 1906, it seemed like a good omen for a roaring bull market, but Wall Street experienced its first crash of the 20th century the following year. It would be nearly two decades later, in the middle of an even greater bull, that the index would leave the century mark behind for good.

A similar pattern held for the 1000 level, first touched in 1966 on an intraday basis at the very tail end of the secular postwar bull market. It wasn’t until 1982 that it was crossed for the final time – we hope. As for 10000, anyone who assumes it’s one for the history books has a lousy memory. The Dow fell 53% between its high in 2007 and its low in 2009. The most recent crossing, early in the current bull market, came more than 11 years after the index first touched 10000.

More than perhaps any other financial indicator in the world, the Dow is both a barometer of social mood and an influence on it. Even financially unsophisticated people know that triple-digit gains or losses, though they don’t pack the punch they once did, are meaningful. In a little over a month since the presidential election, not only stock prices but several measures of economic confidence have surged. Separating cause and effect is difficult.

Last week, the preliminary University of Michigan Consumer Sentiment Index was a 10th of a percentage point shy of a 12-year peak. And a long-running survey by the American Association of Individual Investors has shown a strong swing from pessimism to optimism since the week before the election. The current four-week streak of above-average bullishness is the longest since 2014.

Professionals are even more optimistic. Bank of America Merrill Lynch’s latest monthly survey of global fund managers showed the net share of respondents expecting a stronger economy in a year at a 19-month high. The percentage expecting above-trend growth was at a five-year high.

That should give investors pause since sentiment is a classic contrarian indicator for markets’ medium-term direction. And, while none of these surveys dates back as far as the Dow, there is an excellent proxy for markets’ confidence that serves as a twofer: valuation. Yale professor Robert Shiller’s cyclically adjusted price-to-earnings ratio now stands above 28 based on a decade of inflation-adjusted earnings for the S&P 500 stock index, which tracks the Dow closely.

That puts stocks within the most expensive 5% of all observations in 135 years.

At some Dow milestones that took years to break through decisively – 100, 200, 1000 and 10000—valuation also has been elevated at an average of 24 compared with a little less than 13 when the market finally left those marks behind. Allowing for the possibility that the Shiller P/E is unduly inflated these days, as some claim, that still leaves open the possibility that the market has quite a way to go to grow into its Dow 20000 valuation.

At the long-run rate of inflation-adjusted earnings growth, it would take about 14 years for the Shiller P/E to fall below 20 at current stock prices. That would be par for the course as it took an average of 15 years for Dow 100, 1000 and 10000 to be visited for the first and last times.

Past isn’t prologue, but keep those Dow 20000 hats around – they may come back into fashion around the year 2030.

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