DOW 100,000 Originally published by Tom Butenhoff on 4/12/99
No, "Dow 100,000" is not a misprint. It is a prediction. No, it's not my prediction; it is the prediction of Roger Ibbotson, professor of the Management School at Yale, and president of Ibbotson Associates.
Now, let's face it, anybody can shout out a big number, and that doesn't make it so. Thus, the obvious question: "Why should anybody care about Roger Ibbotson and this prediction any more than any others?" In this case, there is a very good reason. Back in the depths of the recession of 1974 and 1975, with the Dow Industrials hanging around the 600 mark, Professor Ibbotson did a study that concluded that by the end of this century, the Dow Industrials would be at 10,000. Naturally, at the time, nobody believed him.
Why should anybody have believed him? The Dow had been on a three-year decline, coming from a lofty and almost unbelievable area of 1000, where it first closed on November 14, 1972. After that, OPEC and Watergate pretty much killed not only the Dow, but the entire stock market, until mid '75. But, interestingly enough, it was just at that point that Professor Ibbotson was doing his studies and making his "wild" claim that the Dow Industrials would reach 10,000 by the end of the century. Admittedly, the end of the century was 25 years away back then, but still, 10,000 was considered a ridiculous number. "Pie in the sky" from an academic.
Well, as they say, the rest is history. So I think it is more than a little important to concentrate on Professor Ibbotson's new predictions. Simply stated, it is that over the next 25 years, between now and 2024, the Dow Industrials will reach the [now fairly unbelievable] number of 100,000.
Previously in this space, and always in our "Taking Care of Business" seminars, I point out to readers and audiences alike, that over the past 70 years the market has advanced at an average annual compounded rate of 11.1%. And if you look over the past seven decades, starting with 1926, you're just in time to catch the crash of '29, the depression of the '30s, WW II, Korea, and Vietnam. We've had presidential assassinations, near-impeachments, and ought-to-be-impeachments; in short, it has NOT always been "the best of times," yet through it all, stocks, as measured by the S&P 500, have achieved that gain of 11.1%.
What Professor Ibbotson has done now is merely take current numbers and compound them at just 10%, and that is how he's arrived at that seemingly staggering number. As an example, if you start with 9,300 and compound it by just 10% for 25 years, you come up with 100,762.76. If you take the current, roughly 10,000 of the Dow Industrials and perform the same exercise, i.e., compound it by 10% for 25 years, you find that by 2024 the Dow Industrials would be at 108,347.06. It's just a math exercise that you could do on your own calculator, and that apparently is what Professor Ibbotson has done, and that's how he gets to Dow 100,000.
Initial reaction to all of this is that it is just numerical foolishness. It wouldn't even be discussed or published if, in fact, the source were not Roger Ibbotson. In the meantime, people smile and generally dismiss the number; but that's exactly what they did 25 years ago, when "that fool Ibbotson" stood up and predicted Dow 10,000.
As enormous a number as it sounds like currently, I think you have to give the Professor some benefit of the doubt, especially since he is "only" asking the market to do 10%, instead of the 11.1% it has done over the past seven decades. The number really isn't as impossible as it most certainly initially sounds. As always, we shall see. And in this case, I'd love to be around at the time of the event to report it!
(Tom Butenhoff is a First Vice President with J.E. Liss & Company in Milwaukee. The views are his and not necessarily those of Liss Financial Services or the Job Connection/Hiring Network.)
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