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Tuesday, September 28, 2010

Down 38K

Stock Traders Almanac calling for Dow 38,820 in 2025 (per the Big Picture)

As markets and economies struggle over the next several years, remember to keep your eye on the future and get ready for the Next Super Boom and the next 500% move in the market. From the last bottom in 1974 it took eight years before the market really took off in 1982 and then another eight to move up the rest of the 500%, in line with Yale Hirsch’s prediction in 1976 for a 500% market move by 1990. A 500% rise in the Dow over 16 years from the intraday low of 6470 on March 6, 2009 would put the Dow at 38,820 in 2025.
That is an 8.8% annualized change (based on yesterday's close) in the index for the next 15 years (excluding dividends).

How does that compare to history? It is very high, but not completely out of question based on history. Since 1890, the 15 year S&P 500 annualized change in the index has been greater than 8.8% 25% of the time, BUT the average is about half of that at 4.8% annualized.



The main driver of long term equity performance is nominal GDP (see here for details). Thus, this would imply either multiple expansion or much higher growth in inflation or real GDP than we have seen in decades.

Source: Irrational Exuberance