Dow 20,000? It's Not That Difficult

06/12/2013 8:30 am EST

Focus: MARKETS

Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

The media rarely considers the power of compounding when making its forecasts. Put simply, the market doesn't have to grow that much to reach 20,000 by 2020, says Daniel Wiener.

I'm talking about the market with Dan Wiener. Hi Dan and thanks for stopping by.

My pleasure.

Now as we sit here, the market is over 15,000. It seems to be going up just about every day, 15 out of the last 19 sessions or something. Recently, The New York Times had an article, "Dow 20,000 by 2020." Are you a believer?

Right, I love that.

Are you a believer?

I love these round numbers, because it is a little depressing that the financial press doesn't do the math, Maybe they don't know how to do it. But 20,000 on the Dow sounds fantastic.

As we are talking, the Dow is at around 15,200, so 20,000 sounds great, but you know, 2020 is almost seven years away. Do you know what that compounds out at?

Is it around 6%?

No.

What is it?

4.1% is all you need to compound over seven years to get to 20,000 in 2020. I don't consider that a very outrageous forecast, but to just use this number 20,000...it sounds sexy, it sounds great.

I think the other thing that people are not realizing until you do the math is, as we hit these 1,000 mark levels, these sort of hurdles on the Dow, getting to the next 1,000 gets easier every time, right? The percentage goes down every time. We only need, I believe around a 6% return to get over 16,000. That doesn't sound so outrageous.

No, but do you think...I mean, is your gut feeling right now that the market is overvalued, or do you still think that fundamentally earnings are not barn burners right now? I mean, if earnings continue going up and as the economy gets better, one would think that the earnings would really start going up again, so the market should be able to go up even further.

Well, first of all, the market is a discounting mechanism, so in the market investors are looking ahead and saying there is better news coming, earnings are still growing.

We don't have the kind of speedy growth that we saw in the beginning of the recovery, but I believe the last time you and I spoke, I said investors have to get beyond the expectation that they are going to see double-digit earnings growth quarter after quarter. That is not what happens as the economy has expanded, has begun to recover, or as I would say has recovered pretty much everywhere except in the employment situation. So you will see growing earnings, but not growing super-fast.

A nice, calm growth in the economy may not help jobs a lot, but it certainly doesn't get you into an overheated situation. We have got no inflation in the economy; we have very low interest rates, and that also is one of the reasons you are going to see stock prices continue to go up, or at least remain at these high levels, because the competition from bonds is nonexistent.

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