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DOW 38,820?
It could easily happen in 15 years
January 2011
Predictions can be dangerous — which explains why I don’t make many and put very little faith in the predictions of others. But every once in a while, someone makes a prediction that makes so much sense, I can’t help but agree.
The latest example: Jeffrey Hirsch and his belief that the Dow Jones Industrial Average* will reach 38,820 by 2025.
Hirsch is editor-in chief of Stock Trader’s Almanac, a well-known publication within Wall Street circles. In the latest edition of his almanac, Hirsch suggests that the Dow will experience a “super boom” starting in 2017 and ending with the Dow reaching 38,820 in 2025.
Now, I don’t know about any “super boom,” but the chances of the Dow reaching 38,820 by 2025 are actually pretty darn good. As of this writing, the Dow is above 11,000. For the Dow to reach 38,820 by 2025, it would have to return about 8.8% annually — and that’s quite ordinary.
Think about it: The average annual return of the S&P 500 Stock Index between 1926 and 2009 was 9.8%, according to Ibbotson Associates. Thus, Hirsch’s prediction is a full 10% less than the historical return. So his prediction is not nearly as astonishing as it sounds. In fact, I’d be astonished if the Dow wasn’t in the 30,000 to 40,000 range in 15 years.
By the way, if the Dow grows at its 10% average annual return, it will hit 50,000 by 2025.
This prediction may sound familiar — and vaguely disappointing. Perhaps it’s because you remember when James Glassman and Kevin Hasset wrote the book Dow 36,000 in 2000. Their wildly optimistic tome predicted the Dow would reach 36,000 by 2005. They sure were wrong, weren’t they?
Of course, that prediction relied on ridiculously ambitious returns of more than 20% a year for five straight years. Hirsch’s prediction, on the other hand, relies on returns that are below historic rates. In fact, I made a similar prediction in 1991 when I predicted the Dow would reach 10,000 “one day.” (I didn’t say when.) My lofty number may not sound like much now, but at the time my prediction was shocking, because the Dow was then only 3000. But I knew that a mere 7% annual return would catapult the Dow to 10,000 by 2011. The good news was that we got there in just eight years; the bad news is that, after 18 years, we’re still there!
Sadly, not everyone shares my optimism. They look back on the last 10 years as the “new normal,” where the stock market has stopped growing. That’s just silly! It’s like thinking that because it was raining yesterday and is raining today, it will rain tomorrow and all the days after that.
History shows that while a little rain falls on every investment portfolio, the sun has always come out in the end. In the 75 10-year periods since 1926, the S&P 500 Stock Index made money 95% of the time, according to Ibbotson Associates. And in every 15-year period and beyond, the stock market made money 100% of the time.
So don’t listen to those who believe the stock market’s best days are behind us. Instead, stay the course and remain invested all the time so you can enjoy the Dow’s gains when it eventually reaches 38,820 — and beyond.
* An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.
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