By Chuck Jaffe
7% average yearly gain pushes the U.S. stock index to 1 million in 48 years
Market sentiment being what it is, no one expects the Dow Jones Industrial Average DJIA to have put 40,000 in the rearview mirror forever.
No matter what you think of current market strength, simply getting past the 40,000 milestone puts bigger, better landmarks ahead.
Two future markers to consider now are Dow 116,200 and Dow 1 million.
The former was the prediction of mutual fund pioneer Bill Berger in a 1995 speech at a Society of American Business Editors and Writers conference in Boston.
It was laughable then, with the Dow standing at 4,500, even though it was based on common sense; Berger made his call for the year 2040, noting that he was simply predicting that the Dow would return over the next 45 years what it had delivered over the 45 years of his investment career, which started in 1950 with the Dow around 200.
Dow 1 million was the word from famed investor Warren Buffett back in 2017, at a centennial celebration for Forbes magazine. At the time, the Dow was just over 22,000.
Looking back on these forecasts is meaningful now because they are so easy to scoff at, just because the numbers remain ridiculously high. But it's important to know that neither Berger's nor Buffett's predictions were driven by market activity.
Compare that to the infamous "Dow 36,000" forecast published in 1999 by James Glassman and Kevin Hassett (who would go on to become chairman of the Council of Economic Advisers in the Trump Administration from 2017-19) in the book "Dow 36,000" The New Strategy for Profiting From the Coming Rise in the Stock Market."
Dow 36,000 was a market call, a comment on valuations that the authors thought were wildly low. As a result, they predicted a four-fold increase in the index to happen in three to five years. Instead, it took 22 years.
In contrast, both Berger and Buffett were playing long-term averages, expecting history to repeat itself and win out. That's what appears to be happening. Berger's forecast is nearing its 30th anniversary, and the Dow will prove him prophetic if it delivers an annualized gain of roughly 7% for the next 16 years. That's half of the Dow's annualized gain from the past decade. Going back 20 years - to include the impact of the Great Financial Crisis - the Dow's average gain is 10% per annum.
If the Dow gains 7% on average annually moving forward, it reaches 116,200 early in 2040 - hitting Berger's mark exactly as he predicted. At that same 7% rate, it would take roughly 48 years to get to Dow 1 million.
While 7% might seem pretty conservative, the Dow's price-only annual average since its 1896 inception is 5.53%. At that rate, the benchmark gets to 1 million from 40,000 in just under 60 years.
Yet it's easy to stow the long lens in favor of current predictions of a hard landing ahead for the U.S. economy, and a correction or bear market for the stock market. Investors - perhaps spooked by the impact that the return of high inflation has had on their spending - seem particularly jumpy despite the market's new highs.
What investors need to remember is that both forecasts can be true. The market could go through a serious rough patch, and still reach 116,200 in 2040 and 1 million in 2072.
It's why the optimists shouldn't be too fired up by Dow 40,000 and the pessimists too certain that the milestone will be a resistance level this rally can't break for long.
So whether you celebrate Dow 40,000 or think it's the sign of a market top, keep the Berger's and Buffett's forecasts in mind.
Said Adam Grimes, president of Talon Advisors in a recent interview on my podcast, "Money Life with Chuck Jaffe:" "If you are talking about the very long term, a decade or so out, you certainly could make the argument that you should be buying and holding indexed products or a diversified portfolio because there is a tremendous chance that we're going to be higher eight- to 10 years later, but it looks to me like we could be setting up for a rocky two, three or four years."
Time horizon matters, both in forecasts and in your portfolio.
What Berger said in 1995 holds true today: "There's not an investor who has been alive for the last 60 years or more who hasn't seen the market rise over their lifetimes." That period included much of the Great Depression.
"So I don't know exactly where the market is going over the next five or six decades," Berger said, "but I know it will be up."
In light of Dow 40,000, that's about as much as any investor should be predicting and acting on today.
More: A massive earnings surge could lift the Dow to 60,000 and the S&P 500 to 8,000, says top Wall Street strategist
Also read: The stock market has already chosen a winner in the 2024 presidential election
-Chuck Jaffe
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05-25-24 1002ET
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