The Dow 36,000 Call
A Random Valuation Exercise
Lemme see income tax filings from the 2 forecasters of Dow 36,000 made in 1998. I’m talking over 20 years’ worth of returns. The country and its financial markets endured 2 agonizing destabilizations.
First, there was the tech bubble disaster of 2000-’01. Under a decade later, the financial meltdown of 2000-’09 shrunk stocks down to book value, 10 times earnings, yielding 5%.
Currently, the market ticks over twice book and 20 plus times the optimistic earnings consensus. Stocks normally yield 5% at the bottom of market wipe-outs. Now, we’re closer to 1%, hardly competitive with 10-year Treasuries at 1.2%.
Historically, we dwell in fully priced territory unless post-covid 19 business cycle recovery is near at hand. You’d need sustainable per share earnings growth near 10% per annum, more than twice what you normally get to sustain buoyancy.
The Dow 36,000 forecast made in 1998 doesn’t do justice to down cycle carnage experienced in financial markets. The tech bubble of 1999-2000 precipitated an economic contraction while the home mortgage lending fiasco of 2008-’09 took the market down to book value, 10 times earnings and a yield of 5%. Without the U.S. Treasury’s financial package, General Motors would have succumbed along with AIG and Citigroup. Merrill Lynch was merged into Bank of America at $4 a share while Lehman Brothers wallowing in real estate debt was not rescued, to its surprise.
None of such violence is captured in a point-to-point forecast embracing decades. Two- year Treasuries yield 22 basis points now with10-year paper at 1.2%. When Paul Volcker chose to rid the country of its inflationary expectations, he put interest rates up to 15% and the stock market did its swoon to book value, 10 times earnings and a 5% yield.
Long range stats don’t ever capture the bashing of stocks in a vicious down cycle or a disheartened change in market sentiment for specific sectors of the market.
I couldn’t justify Tesla spurting to $900 or even Amazon at $3,500, but they did so. The working phase is stocks can sell anywhere, up or down. Ironically, few of us who manage money ever paid any attention to the Dow Jones Industrial Average. Considered it obsolete and cockamamie. This is less so today as more growth stock names have been injected into the Dow. Looks more and more like the Standard & Poor’s Index today with weighted additions like UnitedHealth Group.
From its low in March of 2020, the S & P 500 Index doubled. But internet and e-commerce paper just matched the market’s recovery. The big story was in basic industrials. Stocks like Alcoa, U.S. Steel, Freeport-McMoRan Copper, even Macy’s and Halliburton went around the clock 3 or 4 times. Ragamuffins basked in the sun.
How many money managers and economists functioning today experienced the chaos in markets during the Cuban missile crisis interlude or the face-off on steel prices between President Kennedy and Roger Blough, headman at U.S. Steel. Remember Black Monday when the market tanked 22% overnight? No economist (or money manager) could ever anticipate such overnight chaos.
Are economists tuned into disparate performance of Dow Industrials, the S & P 500 and the NASDAQ 100 Index? Price-earnings ratios broke out of a 10-year resistance over 10 years ago. In the financial meltdown the market sold below 10 times earnings but recovered to a multiple of 20 past 18 months.
The NASDAQ 100 made a double bottom around 1,000 in 2001 and in 2009. It now sells at 15,440. Why did these economists choose an obsolete index like the Dow? The Dow sold around 10,000 over 20 years ago for an appreciation of 240%. Clearly this was the lesser index to choose for performance projections. What you’d expect from academics with little or no sensitivity to market volatility.
One of my favorite compilations is how foolishly growth stocks can be construed. Mid-2014 you coulda bought Microsoft, Google and Apple pretty close to the market’s valuation. Today, prime growthies sell as high as 2 times the market. Nobody seems too concerned. What about the next 20 years, guys?
Disbelief in Growth Surfaces in 2013- ‘14
Estimated Premium or Discount
to Stock Market Valuation, May 2014
_________________________________________________________________________
Google 10%
Apple -10%
Merck zero
Eli Lilly zero
Bristol-Myers Squibb zero
PepsiCo +15%
Hewlett Packard -35%
Proctor & Gamble zero
Coca-Cola 10%
Intel -10%
Microsoft -10%
McDonald’s zero
Cisco -20%
Oracle -15%
Source: Author’s Estimates
