Today marks the first day the Dow Jones Industrial Average (DJIA) crossed 38,000. New market highs seem to be greeted with both joy and skepticism from investors. In October of 1999, James Glassman and Kevin Hassett published a book named, Dow 36,000. They made bold predictions about the future of stocks. At the time of publishing, the Dow had just reached 10,000. Glassman and Hassett asserted that stocks would soon more than triple and were actually less risky than bonds. In January of 2000, the Dow reached 11,572 and then markets experienced the Dot.com burst of 2000, followed by the terrorist attacks of 9/11/2001. The Dow didn't recover to the 11,572 mark until May of 2006. Investors then experienced the worst recession since the Great Depression in 2007 and 2008. Needless to say, it was no wonder people called it the lost decade!
It wasn't until December of 2021 that the DJIA finally crossed 36,000, thus validating the 1999 prediction of Glassman and Hassett. So what's next for the Dow? I'm going to make a much less bold prediction then Glassman and Hassett and say Dow 50,000! I don't know when it will happen and there's no time frame associated with my statement, though I doubt it will take as long as the Dow 36,000 prediction to come to fruition. Let's look at some reasons why I'm optimistic about my prognosis over time.
Looking back to the '80s, the Dow has experienced five doubling effects. On purely a price basis (dividends excluded), the average time between doubles from the sample below was 7.8 years with the last two taking significantly longer than the first three. To reach 50,000, the Dow wouldn't even need to double — it would require a 31.6% gain from the 38,000 level.
If the DJIA companies only earned the current 1.77% dividend yield, it would take 15.6 years for the index to reach the 50,000 mark. Since the writing of Dow 36,000, the Dow has experienced an average annualized return of 8.70%.
Another reason I'm optimistic is that new highs tend to be followed by more new highs! It's common that new highs happen in clusters that often last many years. According to Ryan Detrick, LPL Financial's former head of research, "Since 1957, there have now been 1,186 all-time highs. But the majority of those new highs took place during three major clusters."
1958 -'68: 281 new highs
1980 -'00: 513 new highs
2013 - current: 348 new highs
Source: Carson Investments Research 1/19/2024
The point is, that the belief that you missed the rally when the market attains a new high is historically wrong. Detrick goes on to state, "The really good news for the bulls here is looking at the past 10 bear markets showed that a year later stocks were higher nine times when new highs were eventually made. Yes, 2007/08 was the one time this didn’t work, but we don’t see many signs of a pending major financial crisis on the horizon and expect to see higher prices a year from now." On average, the markets were up 10.4% a year later after reaching a new high that was preceded by a bear market.
So what could cause the Dow to reach 50,000? One of the most impactful gauges of the market's future return has been the strength or weakness of the US Dollar. In 2022, stocks didn't bottom until October, one month after the US dollar hit its latest peak. With the Federal Reserve likely lowering interest rates this year, we've seen the dollar fall to an 18-month low in December of 2023. If the trend continues down, large market gains will likely follow. One of my favorite technical analysts, JC Parets, examined the weakening of the US dollar and its correlation to higher stock prices. He explains that each time the US Dollar tumbled from a peak in 2016 and 2020, stocks surged shortly after. When I examined the relationship, I found the DJIA increased 32% between the peak and trough of the dollar index from the end of 2016 to the start of 2018. The 2020 peak to trough of the dollar index was accompanied by a 54% gain in the Dow. JC Parets states, "If this chart [US Dollar Index] breaks down and breaks those former highs and we go back down to the 2020 lows (around 90 on the dollar index), that's a Dow 50,000, S&P 6,000."
~ Mike Razzouk
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.