Why Dow 20K is the mark of an underachieving market By Mark Hulbert
* December 15, 2016
If the Dow Jones Industrial Average had risen this century at the same rate as in the last century, we’d be talking about 24K
CHAPEL HILL, N.C. — Far from celebrating the Dow reaching the 20,000-point milestone, investors should be lamenting how long it took.
That’s because the stock market should long ago have reached today’s levels.
This historical perspective teaches us a fundamental truth that investors are missing as they otherwise celebrate Dow Jones Industrial Average DJIA, +0.30% at (nearly) 20,000: The question is never if the stock market will eventually reach a given milestone, but when.
Consider where the Dow would be today if the stock market so far this century had risen at the same rate as it had in the last century. Believe it or not, it would be above 24,000.
A perfect illustration of the need to focus on a forecast’s time frame comes from Richard Band, editor of the Profitable Investing newsletter. In early 2008 he forecast the Dow was headed to 16,000 in as little as a year. At the time, it stood around 12,000.
From today’s perspective nearly nine years later, of course, Band’s forecast if anything seems tame. Nevertheless, because the path the market took to get to 16,000 first took the Dow nearly 6,000 points lower, he was roundly criticized for it. In an early 2015 interview, Band told me that his 16,000 prediction was “the biggest forecasting blunder of my career.”
That’s an amazing concession, since history has largely vindicated Band’s bullishness. In fact, according to the Hulbert Financial Digest’s performance monitoring, his model portfolio is one of the few to have beaten a buy-and-hold in the stock market this century.
Another way of making my point is to contemplate when the Dow will reach 100,000. To us today this level seems as impossibly out of reach as 20,000 did to investors in the 1980s and 1990s. But it is nearly certain we will reach Dow 100K sometime this century.
The chart at the top of this article shows why the question isn’t if, but when. As you can see, the Dow will reach 100,000 in 2098 even if it rises at an annualized rate of just 2% — far lower than its historical rate of return.
As we assume higher rates of return, of course, the Dow reaches 100,000 far sooner. At a 6% annualized return, for example, the milestone is reached in 2044.
So subject your celebrations of Dow 20,000 to a reality check. The fact of the matter is that the stock market this century has been an underachiever.
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