Will the Dow Jones Industrial Average (DJIA) hit 20,000?
Just a few years ago, serious market analysts dismissed this as pure fantasy. The reality, however, is that the Dow closed today’s trading at 18,867. That’s only about 6% short of the vaunted milestone.
A rapid swing of 1,000 points in the Dow is not that unusual these days. It’s advanced that much since November 4, the Friday before the election. Meanwhile, the economically expansionist and inflationary policies being advocated by the incoming Trump administration make reaching that 20,000 plateau increasingly likely, in the view of some experts. (See: Investor Strategies for Wall Street’s New Volatility.)
The Case for Dow 20,000
Seth Masters, the chief investment officer at Bernstein Wealth Management, predicted Dow 20,000 back in July 2012, when investor pessimism was rife, and the widely followed index stood at 12,500. He told the Wall Street Journal that this prediction “really hit a nerve.”
Nonetheless, Masters was somewhat cautious. Revising his forecast in 2014, he didn’t expect the 20,000 mark to be reached until 2018. He based his original call on historical analysis. Since 1901, every time bonds had outperformed stocks for at least a decade, a bull market in equities had followed. That was precisely the situation in 2012.
Right now, Masters expects stronger economic growth leading to improving corporate profits over the upcoming five years. Attractive equity values relative to bonds also bode well for a continued bull run in the stock market, in his opinion. The Wall Street Journal also reports that, in August, the consensus earnings estimates of Wall Street analysts started predicting Dow 20,000 within the upcoming year.
Jeremy Siegel, a veteran professor of finance at The Wharton School, has been a longtime advocate of equity investing, best known for his book “Stocks for the Long Run.” In a post-election discussion on Wharton Business Radio, he makes the case for Dow 25,000 within the next five years.
Siegel points out that, if the market posts reasonable nominal annual returns of 6% to 6.5%, or about 5% after deducting inflation, the Dow will reach 25,000 in five years. Moreover, he adds, “when you look at it from a broader perspective, the Republicans who swept Congress as well as now the presidency are far more capital friendly than the Democrats by a huge margin.”
Though he was not making any predictions about the Dow, in a May 2016 interview with CNBC, Siegel asserted that “Equities are the major income-producing asset of the future.” This was long before the prospect of a President Trump was taken seriously. In particular, he spoke about a shift of investor focus to dividend-paying stocks, much as in the 1950s and early 1960s, which he sees as a positive development.
Forecasts of 90% Correction
Pessimists point to rosy predictions that briefly gained notoriety for their proponents, but later proved to be pure fantasy. For example, in 1999 economists James Glassman and Kevin Hassett saw the Dow surging to 36,000.
Meanwhile, Robert Wiedemer, best known for his book “Aftershock,” has predicted a massive market correction of as much as 90%. He gained credibility by forecasting the subprime mortgage meltdown. Wiedemer expects an inflationary surge of 10% to 20% as a result of years of quantitative easing by The Fed, that will destroy the value of bonds, cause a collapse in real estate, and then in equities.