Dow Jones' 20,000 milestone gives pause for reflection
As a 25-year old reporter for the Associated Press, I wrote the stories that appeared in many of the nation's newspapers when the Dow Jones Industrial Average first broke 1,000 on Nov. 14, 1972.
Now that the Dow has cracked the 20,000 barrier, it inspires a lot of thoughts.
The first thought is that the United States' economic system is inherently strong. Gloom-and-doom prognosticators are likely to lose a lot of money — or at least leave a lot on the table. After all, the Dow has gained 1,900 percent since that day, which I still remember well.
My second thought is that I disagree with people who think when the market hits a record, it is “high” and therefore a bad time to invest.
Ned Davis Research Inc., my favorite market-research firm, has studied this question in depth. It examined 40 significant milestones on the Dow, from 100 (in 1906) to 18,000 (in 2014).
On average, the Dow advanced 9.9 percent in the year after hitting a milestone.
That's better than the normal annual gain in the index, which is 6.6 percent a year.
Bear in mind that the Dow Jones industrial average doesn't include dividends; it's a price-only index. Throw in dividends, and stocks have historically returned an average of 9 percent to 10 percent a year, over decades — admittedly with a lot of ups and down.
So, in my judgment, Dow 20,000 is not a reason to worry about the course of the market. There are other valid reasons to worry, however.
• Valuations are high. The average stock in the S&P 500 index sells for about 26 times earnings, up from 21 a year ago. (Historically, normal is about 15.) It sells for more than three times book value (corporate net worth), also rich.
• President Trump is inexperienced politically and untested internationally. A sharp dispute with Mexico probably won't upset the markets too much, in my opinion. But a clash with China or Russia might. Any setback in the fight against terrorism could spook the markets.
• The stock market has been up eight calendar years in a row. That is the second longest winning streak on record, the longest being nine calendar years from 1991 through 1999. These things don't go on forever.
• Interest rates are rising, and are likely to rise some more. Soon it will be time to dust off market pundit Edson Gould's old rule about “three steps and a stumble,” suggesting that when the Fed raises interest rates three times, investors should start to worry.
That's why I have taken some steps that I hope will reduce my clients' risk. Most of the client portfolios I manage have about 24 percent of the money in stocks based outside the country. We are, for the first time in years, buying a little gold.
I've also raised a little cash in most client accounts, intended to help me snatch up bargains if they should become available in a market decline.
Do I expect a significant decline in 2017? No. My guess is that the market will trace a zig-zag course with lots of chills and spills, but end the year up. Corporate profits are likely to be strong. Cuts in personal and corporate taxes would probably boost stocks, as would reduction in regulations.
However, investing is a game of probabilities. While I don't predict a decline, one wouldn't be surprising, given the circumstances I've laid out above. I will strive to make volatility the friend of my clients, not their enemy.
On March 22, 2013, I made a rather bold prediction on CNBC television. I said I expected the Dow to hit 25,000 sometime in 2017. At the time, the Dow was at 14,421.
It looks now like I was too optimistic. If my prediction comes true this year, I will be surprised. For it to pan out, the Dow would have to rise 27 percent this year, or 24 percent from its January 27 level.
That's unlikely. However, it's not impossible. Since Charles Dow created his index in 1896, the Dow has risen 25 percent or more in a year 22 times. It has happened at least once in every decade except for the 1960s. The most recent times were 2003 and 2013.
Like most professional investors and stock-market pundits, I've passed through three phases. At first, I believed that some people could predict the market, but not me. Then I believed that most people couldn't, but I could. Finally, I came to view the market as unpredictable, but endlessly fascinating.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Mass., and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.