Prediction: Dow to hit 25K in '17
For the past 13 years, the stock market has zigged and zagged but shown only a modest net gain. I believe that long-bleak period is ending and a new, secular bull market is beginning.
My prediction is that stocks will show a 15 percent compound annual average return for the next four years. I expect the Dow Jones Industrial Average to reach 25,000 in 2017. It stands at about 14,500 now.
I first made this prediction on Friday on CNBC, and the hosts thought it was extraordinarily optimistic. It is, by comparison with the gloomy outlook held by most investors today.
But such a spurt by no means would be unprecedented. In the four years ending in 1999, stocks rose by about 26 percent a year. In the four years through 1986, they rose 19 percent a year. And in the four years through 1956, they rose more than 20 percent a year.
Over the decades, a normal return has been about 10 percent, including reinvested dividends.
When I refer to gains or losses in the overall stock market, I use the Standard & Poor's 500 Index as my yardstick. But I expressed my prediction in terms of the Dow because it is a gauge so familiar to most people.
The S&P 500, a much broader measure than the Dow, stood at 1,556 as of Friday, and I expect it to hit 2,300 in 2017. With dividends, I expect it, too, to return 15 percent per year over the coming four years.
There are at least five reasons why I believe we are headed for a better market climate.
• The recovery now in progress is, in my opinion, a classic 1950s-style recovery, driven by autos and housing. There is a lot of pent-up demand for both.
• The excesses of the 1990s Internet-and-technology bull market have been wrung out of the system. The bear markets of 2000-2002 and 2007-2009 (plus a near-bear in July through October 2011) did the job thoroughly.
• Stock valuations are now reasonable, with the average stock selling for 15 times recent earnings and 14 times projected 2013 earnings.
• Few people dare to believe that the stock market recovery will persist. They are traumatized by a decade of subnormal returns in the 2000-oughts. Paradoxically, this skepticism helps the market; it creates a pool of investors who gradually will come back in.
• Hiring is gaining momentum. Jobless claims are now running about 330,000 per week, which is half of the worst level during the recession, and only about 50,000 more than in the boom times before the financial crisis.
I often run into people who say they will invest when a certain difficulty in the economy or in the world is resolved. They want to see a resolution to the Gulf oil spill, or to Iran's sabre-rattling, or to the recession in Europe, or to the partisan deadlock in Congress over the federal budget.
The trouble with that approach to investing is that waiting for an “all clear” signal is fruitless. There is no time when there are not problems, and even crises. The person who waits for such a time will wait forever.
On CNBC Friday I was asked about the impact of the Cyprus banking crisis. In my view, it will have minimal impact on the U.S. economy or market.
Many investors, I believe, overstate the importance of Europe and understate the importance of Asia and Latin America. Four countries account for about 49 percent of U.S. trade. They are Canada, China, Mexico and Japan — nary a single European country in there.
Germany is our largest European trading partner, accounting for about 4 percent of U.S. trade. Cypress is hard to find on the economic map.
Investors, in my opinion, should own at least 10 stocks in a variety of industries. I favor selecting stocks with low price relative to earnings, and with strong balance sheets (low debt to equity). If you can't buy 10 stocks, you should buy a mutual fund until you can.
No one should invest in stocks, a volatile asset, unless they have at least three and preferably six months' worth of savings in a bank or money market fund.
Some individual stocks that I currently like include Carlisle Cos. (CSL, a conglomerate with a big roofing business), Flexsteel Industries Inc. (FLXS, furniture), Magna International Inc. (MGA, auto parts), General Motors Co. (GM) and Western Digital Corp. (WDC, disk drives).
If you don't believe my prediction, join the crowd. But I believe better times are ahead.
John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist: firstname.lastname@example.org.