Dow 20K

Someone needs to say this:

Dow 20K.

The fear mongers abound in the financial media.  TV and online ratings seem to go to those helping to peddle fear and sell gold or structured annuities (with high commissions attached).   Every individual investor I meet is scared silly.  They do not realize what is at stake.

For the mainstream media, it is all about ratings.  They have all learned that fear sells.  Attacking Obama, attacking Bernanke, attacking European leaders, explaining government policy as if it were the family budget —  it all works.  The big-time media have garnered page views and sold papers.

Even when they attempt to show "balance" they have someone warning about Dow 5000 and the "bull" saying that stocks will go up 8% this year!  Is it any surprise that watchers are scared witless?

Investors need to understand that they are missing more than an 8% move.  Stocks will double.  When will they get on board?  Do they have a plan?

The Proposition

Let us attempt to restore some balance.

There is undue publicity given to Dow 5000.  A 50% decline has happened only twice in history.  The first time was in the Great Depression.  The second time was when people incorrectly believed that the fall of Lehman would lead to another depression.  As we now know, that was incorrect.  March, 2009 was a buying opportunity.  What about now?

Here is the proposition.

The Dow will double before it is cut in half.

I want to make this proposition right now, with the Dow around 10,000 and many forecasting 5000.  A prediction needs a time frame.  That is part of my current research.  For the moment, let me just say that it is shorter– much shorter — than most people would think.

The key point?  Most do not realize the cost of sitting out the return to normalcy of stock prices.

Obviously, this argument needs more evidence.  With the Dow crossing 10,000, today was the right day to start.

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  • JohnF May 26, 2010  

    Possibly…but you may also be experiencing confirmation bias from only having seen stock prices recover easily from recessions.
    To me, the numbers around the globe represent massive overborrowing leading to debt/deflation cycle of epic proportions. Debt/deflationary periods are typically long and harsh for stocks.
    Sadly, our policy leaders have only made this worse by not properly recapitalizing banks. I am much more cautious.
    Just looking at the other side of the coin, 😀

  • Curtis May 26, 2010  

    Interesting, the DOW is one of the few indexes I pay the least attention too. Amateurs look for ‘big baggers’ and pay attention to the DOW level. You could be right. I’m on the inclination we are in a mutli-year range, that means a 50% upside potential or 50% downside potential too. But I don’t have valuation models, as I assume you do.

  • Jeff Miller May 26, 2010  

    John F – One of the reasons to study quantitative methods, research design, and modeling is to escape reliance on the anecdote.
    It is empowering. You can look at information far beyond your personal experience.
    My conclusion will rest upon a wide range of research. Here I merely mentioned the historical odds.
    As you know from past articles, I think that many people peddling the debt/deflation story have an overt political agenda. My own interest relates to investment success, not influencing voters in the next election.
    I welcome your comment, and hope you will continue as this plays out.

  • JohnF May 26, 2010  

    I don’t share the political agenda of those peddling the stories of debt/deflation. I’m just looking at the history of what happens when debt levels are so high, and echoes from the past suggest serious issues.
    I don’t recommend cutting the budget to the bone overnight and eliminating government.
    I think we could have avoided much of this problem if policy makers had taken the Swedish solution to the banking problem. Sadly, we turned Japanese both here, China and Europe.
    Obviously, we can rally hard during these periods, per parts of 1930 and 1932. But these are merely tradeable rallies.
    In fact, looking back at 1932 the growth rates off the bottom were much better than the ones we’re seeing.
    I’m personally avoiding stocks, aside from trades, until they become cheap. We are so far from that…
    It would take me a while to comment on modelling. I don’t have much faith in most economic models…

  • heywally May 26, 2010  

    I look forward to the research; as long as corporate profitability remains in an uptrend, I will continue to patiently buy the dips, for short term trades. Given what’s happened historically, I’m reluctant to “buy/hold” for extended periods, as long as we remain below the 200-day. I’m also wary of my fellow market participants, the Machines.
    “One” of the other things that is always there and concerning, are Iran, Pakistan, the Koreas; geo-military danger, seemingly always sitting there on the back burner.

  • Simit Patel May 26, 2010  

    as a previous commenter noted this is similar to the bounce off the 1929 crash. the catalyst for the resumption of the downtrend in the 30s was bank failure in europe. the catalyst catalyst for the resumption of the downtrend now is….
    also, deflation is not bad. when was the last time consumption AND savings increased in the US? november 2008, in the wake of the october 2008 deflationary episode. deflation allows cash to strengthen and savings to be re-built while also enabling consumption to increase due to lower prices. savings are the foundation of any economy. the US is a country with a negative savings rate….

  • Mark Hill May 26, 2010  

    Great ideas as usual. Your brain is bigger than a planet.
    Your May 19 comment …”We are currently short in our ETF programs, invested only in inverse ETF’s.”
    It is a little rough to bury the little private investor for not buying stuff / selling stuff when you are short as GeorgeW?
    And … does the little guy really have to buy the market now … couldn’t he wait until things calm down a bit?

  • Jeff Miller May 26, 2010  

    JohnF — Fair enough. A key theme here is to monitor our economic predictions. It is fine to disagree.
    Personally, I don’t find “old time” comparisons very helpful. But I am curious. If you think that experience is relevant, why don’t you have a little more confidence in Bernanke? Surely he knows about about the subject than we do, since it is an area of his specific expertise.
    Just a thought…

  • Jeff Miller May 26, 2010  

    heywally — There are a lot of ways to make money in the investment world. I think trading is great, as you know. I also think that the 200-day moving average is the most important single indicator, as I often note.
    There will never be a time that is free of worry.
    Thanks for taking the time to comment.

  • Jeff Miller May 26, 2010  

    Mark — I don’t know about the brain. One of those commenting at Seeking Alpha thinks I have been hitting the crack pipe!
    Our short-term models are all out of the market. There is often a discrepancy between short-term trading and the longer time horizon.
    A stock trade can be “correct” for both buyer and seller if it fits individual needs, risk tolerance, and system.
    I did NOT write “Buy stocks now.” I AM trying to get people to think about overall risk and reward in a balanced way.
    If the article plants a germ of an idea for people, enough to get them paying attention, there will be time to buy.
    Good question.

  • Steve May 26, 2010  

    I see the claim about Dow 20K, but I am not sure what the rationale is. You referenced run ups after huge crashes, but were they in the context of massive debt and budget deficits as far as the eye can see?

  • Jeff Miller May 26, 2010  

    Steve — At the moment, my only “claim” is that the news you are seeing has a huge bias. You should keep an open mind since the historical odds suggest that Dow 20K is much more likely than Dow 5000.
    It is not investment advice or a suggestion that everyone buy right now. It is meant to restore balance to an unbalanced world.
    Of course there are (well-publicized) problems, or there would be no opportunity. I have written about deficits and the likely path forward on several occasions. Try the search box. Just type in deficit and see what you get.
    To summarize – the article was to balance risk and reward, and to stimulate thinking. I understand that many people have their minds made up, so I appreciate your question.

  • JohnF May 27, 2010  

    To me, markets haven’t really changed all that much aside from added and unnecessary complexity. The emotions that drive them to new highs remain in the market, until it blows up, resulting in the 100 year (every five years) flood.
    The 1920’s and 30’s were eerily similar to now . China has taken on the role of the US holding massive currency reserves from exports (similar to US holding of gold in 1920’s). Debt and complicated investment schemes (what were then complex) ignited the fire to blow up the market and then explode the bubble.
    I think Bernanke is ok. He tried his best to be creative and fight deflation. He gets that much. But his political bent and his ties to the current economic theories are not helpful.
    Thus, he’s just another cog in the financial oligopily that rules the US (I’m particularly sounding like Simon Johnson because the political power of Wall Street is a great concern) and will stop any real reform of our financial system. There’s too much leverage in products that create unintended consequences.
    It’s very tough to make financial predictions. I’m more in the Keynes and Taleb school of trying to avoid too much prediction. There’s so little we know.
    Even worse, most financial models are based on poor assumptions that don’t really reflect the real world (I think Yves Smith nicely wrote this up in her book Econned).
    Such a complex topic that I enjoy thinking about it… but leaving it there for the moment.

  • May 27, 2010  

    You’re an idiot. A depression DID occur and we are still in the midst of it. But for the TRILLIONS in govt. “stimulous” serving as a phony prop, the real economy would show that we are indeed in a depression. Unemployment – true unemployment – is closer to 20% than it is to 10%, and our debt levels as a % of GDP are over 12% with no means or capacity to repay it without devaluing the dollar while further increasing taxes all on top of a non-producing economy here in the US. If that’s not a depression, then it certainly is depressing. And if the DOW does go to 20k in the short term, it will only be because of zero interest money that the criminal Federal Reserve keeps channeling into the markets so the banking speculators can drive an empty rally upwards. There are no fundamentals to support current PE’s but speculators will continue to speculate.

  • Bo May 27, 2010  

    What’s your response to this arguement: the forward earning forecast is so out of line that it is useless as a valuation metrics? The recent research from Mckinsey shows that sell side analysts have consistently and significantly overestimated earnings for a decade. Also if you use forward earning yield, you will see Greece and Spain has the best value since end of 2009. Would you buy Greece and Spain?

  • May 27, 2010  

    Jeff, … From your mouth to God’s ears!! … I just took my 401k out of stocks and converted to cash for the first time in the 18 years of my 401k … I had nothing to go on other than being an average joe who will need the money in 3 years, thus I’ve gotten’nervous’ about the Dow swinging wildly of late … I would simply switch back to the market if any real rally is underway PG

  • Jeff Miller May 27, 2010  

    zorch – The blog is not intended as investment advice. Each person is different. With that in mind, you are wise to pay attention to your tolerance for risk. You can reconsider when things are better, as long as you are willing to pay higher prices.
    In fact, that is what most individual investors do. It is important to be tracking the right indicators. That will be part of the Dow 20K project.

  • Jeff Miller May 27, 2010  

    Curtis — you are absolutely correct on the Dow and big bagger focus, especially penny stocks.
    Here’s something to try on the next person who offers a day opinion. Ask them to name the Dow stocks and see how many they can get.
    People have extremely strong opinions even without information or analysis. Is this a great country, or what?
    Good comment.

  • Jeff Miller May 27, 2010  

    Jpthomas – I can see that you have strongly-held viewpoint and that you are pretty emotional about it. I am happy to have readers consider your observations and draw their own conclusions on the merits.
    I do have one request: No name calling. I treat my readers with respect, and I expect the same. I am going to delete comments from those who do not follow this rule.
    Fair enough?

  • Jeff Miller May 27, 2010  

    Bo — Did you read the report, or did you read what someone told you the report said?
    I look at 12-month forward earnings on the S&P 500. When you look at the report, please explain to me what it says about that specific question.
    Also read the discussion in the comments with Mike C.
    Thanks for raising this point. I will have to do an article on this topic.

  • cool May 27, 2010  

    S&P 500 at 1500 by April’11 is possible

  • Griffin May 29, 2010  

    I remember when the DOW crossed 10,000 the 1st time 10 years ago, all these books came out saying “DOW 40,000 by 2010!”.
    It’s really common sense, look at a monthly chart of the DOW since the beginning. During this period of leverage the last 25 years, the DOW has gone from 3,500 to 14,000 back to around 10,000. So for almost 60 years, the DOW was topped at 3,500 and in the last 15 years the DOW has gone from 3,500 to 14,000 back to 10,000.
    Look at the chart, it has to go back and retest the 4,000-5,000 area before it can continue higher.
    I heard the same arguments for DOW 40,000. Seems they did not work out.

  • Goatmug May 29, 2010  

    Is that Dow 20,000 adjusted for the decline of the dollar? I might agree with you as long as you don’t do any adjustments for purchasing power.

  • Jeff Miller May 29, 2010  

    Goatmug — I am not talking about any adjustments, just the Dow in nominal terms. People need to think about the gradual decline in purchasing power, and various methods of protection.
    Thanks for your helpful observation.

  • Jeff Miller May 29, 2010  

    Griffin — I remember the same book. While I was not blogging at the time, my feeling was that the underlying argument and reasoning were very poor.
    I would not have raised this topic for consideration in the 1999 era, since every metric I follow showed significant over-valuation in most stocks.
    I am not depending upon a chart or a trend for the thesis I am developing, but there are a number of positive long-term forces.
    Your comment is interesting — especially the confidence that there must be a retest.

  • Gregory P May 31, 2010  

    You can delete the comments all you want, you would [name calling deleted- JM]. You have not actually provided a fair balance to any of your arguments, you have just argued the other side and stated Q.E.D You have not provided any proof at all that DOW 20k will happen without some severe inflationary event.
    Even a chef has to provide his proof in his pudding. You however just argue that the recipe proves it. Not clever.

  • Gregory P May 31, 2010  

    Hmmmm, gradual decline? Yeah I really really want to get rich by having my purchasing power eroded. Good thinking. Bring on DOW 20k.

  • Jeff Miller May 31, 2010  

    Gregory – I am giving you a one-time pass on name calling since you have an interesting point.
    You are correct in saying that I am not writing to illustrate two sides, as I frequently do in describing short-term trading and market moves, in my face-off series, and in my weekly market assessment.
    There is an excellent reason for this, which you will see if you read the article more carefully. I am trying to RESTORE balance, getting people to think about the issue with an open mind. There will be plenty of arguments to ponder on this question. It is too complicated for a single article.
    I hope that you will continue to participate in a civil and adult fashion.

  • Jeff Miller May 31, 2010  

    Gregory —
    The Dow 20K thesis will have several legs, but concern about inflation is one of them.
    Let us suppose that we expect inflation. Wouldn’t it be a good idea to protect our assets somehow?
    Most people will live in retirement for many years, and even modest inflation will greatly diminish their purchasing power.
    Do you have an alternative recommendation, or is it your plan to specialize in sarcasm?

  • Joe June 20, 2010  

    You do not have a crystal ball,it is wise to say that the unprecedented federal deficit will cripple the United States and that a double dip recession is just around the corner. Just remember those with a crystal ball eat glass! LoL