Dow 36000! Don't retire if you doubt it.

[NW-Bound]

Dow 36000! Don't retire if you doubt it. That's the gist of the following article.

The return of 'Dow 36,000' - MSN Money

The author argues that if we assume that the market will rise at the historical rate, then the Dow will be at 36,000 in ten years. Ten years is not a long time. We are already 5 years from the start of 2008-2009 recession, and I felt it like yesterday.

The author uses an average market return of 8%, which is 5% real growth over 3% inflation. The nominal historical rate has been quoted as higher, such as 9 to 10%, but that includes dividends.

Your thoughts?

 

[bondi688]

Whee?

 

[Onward]

Shush!

 

[comicbookgujy]

Wooot. I'm going to be RIIIICH!!

Or poor

 

[audreyh1]

I thought the main point of the article was that we can't get there from here.

 

[obgyn65]

My thought is that Dow at 36,000 is not likely in my lifetime. Maybe 20,000 in 20-30 years from now.

 

[NW-Bound]

I thought the main pont of the article was that we can't get there from here.

Yes. It was likely the other posters did not read the article. And I will admit to having made a sensational thread title, like the reporters like to do.

As I surmised in some posts elsewhere, I did not see any development that could have the market grow like the past periods of boom, namely the industrialization, the post-depression, the post-WWII, and the post-Cold-War periods. All I hope for is that the market will muddle along.

That means that the chance of us seeing our stash grow to the sky like the most optimistic traces in FIRECalc is nil. Those exceptional runs were due to unique periods in the US history, and we need a new earth-shaking fundamental improvement which no one has seen yet. Hence, I looked at the past, and hope we will not repeat what was described in another thread here: http://www.early-retirement.org/forums/f28/historical-worst-time-for-a-retiree-67673.html.

That period of 1960-1980 was awful, and I surely hope we will not go through another one like that. I am going to stick with my 70/30 AA, but think I should temper my expectation that I will find myself richer every year. If my 70/30 composition will allow me to live off 3.5% WR (can be lower once I start SS), and does not deplete my stash too fast, I should feel grateful. I hope that's not too much to ask.

 

[teejayevans]

Dow 36000! Don't retire if you doubt it.
The author uses an average market return of 8%, which is 5% real growth over 3% inflation. The nominal historical rate has been quoted as higher, such as 9 to 10%, but that includes dividends.

Your thoughts?

8% is what I've average over the past 30 yrs, remember its a LOOOONNNNGG term trend.
Ten years isn't long term...
TJ

 

[Gatordoc50]

When I started investing, long term returns were at 12%. Now they are down to 8. I would guess that in 10 years we could see long term returns dropping further.

 

[Which Roger]

If the Dow can go from under 7000 to 15600 in a little over 4 years, it can certainly go from 15600 to 36000 in 10 years. Or it might not. Or it might even go higher than that.

 

[harley]

As I surmised in some posts elsewhere, I did not see any development that could have the market grow like the past periods of boom, namely the industrialization, the post-depression, the post-WWII, and the post-Cold-War periods. All I hope for is that the market will muddle along.

That means that the chance of us seeing our stash grow to the sky like the most optimistic traces in FIRECalc is nil. Those exceptional runs were due to unique periods in the US history, and we need a new earth-shaking fundamental improvement which no one has seen yet.

I believe that's the point. You can't see the big things coming that create the rampant growth. While I freely concede that as things stand right now we're likely in for slower growth/stagnation/muddling along, all it will take is "The Next Big Thing" to come along and change everything. Personally I'm hoping for cold fusion and jet cars, but who knows what it might be. Very few saw the internet coming, or factory production lines, or some of the other things that drove rampant growth in the past. IF it happens, it will just happen and hopefully I'll be in the market and invested to take advantage of it, watching my personal Firecalc line climbing up with the more optimistic ones. If it doesn't happen I guess I'll be in the market muddling along, and hopefully my personal line won't drop through the bottom. But to say the chances are nil implies knowledge of the future that no one has.

 

[Ready]

At the end of the article he suggests that the current market is as overvalued as it was during the major market crashes, including 1929. He suggests we may have a 40% correction coming. I'm not an expert at tracking the valuations of the stock market, but I don't remember reading other recent articles suggesting the market is as overvalued as it has been in prior major crashes.

What do you all make of that?

 

[Hamlet]

Valuations are nowhere near as high as they were in 2000. Many of the blue chips had valuations in the 30-40 times earnings range. This link points out something important though--

How Overpriced Were Stocks in 1929? Crossing Wall Street

Basically, there are two ways to get a crash. You can have prices get so wildly overvalued that they have to come down at some point. 2000 was that type of crash. The other possibility is that fundamentals can crash and the market follows them down. 2007 (and 1929) was that kind of crash. Valuations may have been a little high, but the primary driver was that earnings disappeared.

So it is always possible that we could have a big crash, but a crash like that is going to require another severe drop in earnings.

At the end of the article he suggests that the current market is as overvalued as it was during the major market crashes, including 1929. He suggests we may have a 40% correction coming. I'm not an expert at tracking the valuations of the stock market, but I don't remember reading other recent articles suggesting the market is as overvalued as it has been in prior major crashes.

What do you all make of that?

 

[photoguy]

My thought is that Dow at 36,000 is not likely in my lifetime. Maybe 20,000 in 20-30 years from now.

Given that the dow is 15k now, your forecast implies a nominal return of 1 to 1.4% per year. This seems very pessimistic.

 

[nash031]

My thought is that Dow at 36,000 is not likely in my lifetime. Maybe 20,000 in 20-30 years from now.

It wouldn't surprise me to see the Dow at 20,000 by the end of this decade. That would equate to just under 4.5% annual return on the market. While that's by no means guaranteed in the short term, it would be far from unheard of. 20-30 years from now would indicate that the stock market underperformed inflation... not impossible, just unlikely.

 

[nash031]

Given that the dow is 15k now, your forecast implies a nominal return of 1 to 1.4% per year. This seems very pessimistic.

My thoughts exactly.

People need to remember that indexes are just numbers. They're relatively meaningless without correlation to other numbers. Inflation drives quite a bit of the raw growth seen in the market, that's why it is informative to compare market levels adjusting for inflation.

It always makes me smile a little bit when the market sits just below a certain number for a few weeks because, in essence, investors are thinking "Well, the S&P just can't sustain itself above 1,700". It's just a number until you compare it to something else (Forward P/E, etc.).

 

[nash031]

At the end of the article he suggests that the current market is as overvalued as it was during the major market crashes, including 1929. He suggests we may have a 40% correction coming. I'm not an expert at tracking the valuations of the stock market, but I don't remember reading other recent articles suggesting the market is as overvalued as it has been in prior major crashes.

What do you all make of that?

He's doing some bad math. Valuations right now aren't as high as they were in 2000 or 2008. I believe last I checked forward P/E was higher than the average bull market, so he may be right that there's a correction coming. In fact, there is ALWAYS a correction coming... kinda how this thing works.

40%? I don't think so. But since my retirement timeline is a few years down the road and I have some cash handy, I can only hope to get that kind of value!!

 

[Ready]

He's doing some bad math. Valuations right now aren't as high as they were in 2000 or 2008. I believe last I checked forward P/E was higher than the average bull market, so he may be right that there's a correction coming. In fact, there is ALWAYS a correction coming... kinda how this thing works.

40%? I don't think so. But since my retirement timeline is a few years down the road and I have some cash handy, I can only hope to get that kind of value!!

That is great for people who are still contributing to their savings, but what about those of us who are not earning income anymore? How should we feel about a 40% correction?

 

[Which Roger]

I can almost guarantee that there will be a 40% correction. I just don't know whether it will be tomorrow, next year, 10 years from now, or sometime after that.

I am not as pessimistic about future stock returns as some are. Everything that is known or expected is already priced into the market, and investors would not accept the inherent risk of stocks if they were expecting such poor returns. Unless of course they believe that stocks are significantly less risky than they were in the past, which is probably true to some extent.

 

[NW-Bound]

We will have more corrections. And I hope I will be able to rebalance more aggressively than I did in the past.

However, what the article talked about and also my concern is about the secular trend of the market, not the wild cyclical gyrations. In fact, even if the market only bounces around, people who [-]jump in/out[/-] rebalance can still make money, while the buy-and-holder will not. Such opportunity does not exist in a placid market.

I believe that's the point. You can't see the big things coming that create the rampant growth. While I freely concede that as things stand right now we're likely in for slower growth/stagnation/muddling along, all it will take is "The Next Big Thing" to come along and change everything. Personally I'm hoping for cold fusion and jet cars, but who knows what it might be. Very few saw the internet coming, or factory production lines, or some of the other things that drove rampant growth in the past. IF it happens, it will just happen and hopefully I'll be in the market and invested to take advantage of it, watching my personal Firecalc line climbing up with the more optimistic ones. If it doesn't happen I guess I'll be in the market muddling along, and hopefully my personal line won't drop through the bottom. But to say the chances are nil implies knowledge of the future that no one has.

The bold face above is mine. Yes, the above assertion is too strong, and I also hope to be pleasantly surprised. In the mean time, I will just maintain a traditional AA, and hope it will at least match inflation.

 

[NW-Bound]

If the Dow can go from under 7000 to 15600 in a little over 4 years, it can certainly go from 15600 to 36000 in 10 years. Or it might not. Or it might even go higher than that.

The 7000 to 15600 is counting trough to peak. If we discount the effect of the correction, then on longer term peak-to-peak trend, the Dow has moved from 11000 in 2000 to 15600 in 2013.

That works out to a 2.7% annualized gain. After accounting for inflation, it's flat in the last 13 years.

 

[tulak]

That works out to a 2.7% annualized gain. After accounting for inflation, it's flat in the last 13 years.

And somehow we are all doing well!

 

[NW-Bound]

Yes, people who are still accumulating in the period 2000-2013 do OK if they keep on buying through the two market crashes.

So do retirees in the distribution phase who rebalanced during the crashes.

... even if the market only bounces around, people who [-]jump in/out[/-] rebalance can still make money, while the buy-and-holder will not. Such opportunity does not exist in a placid market.

 

[tulak]

Yes, people who are still accumulating in the period 2000-2013 do OK if they keep on buying through the two market crashes.

So do retirees in the distribution phase who rebalanced during the crashes.

I've never bought the premise of buy and hold without rebalancing. I don't believe that anyone does this and if they do, then they should own a fund where the rebalancing automatically happens.

This would also assume that your buy and holder owns only one equity asset class, which I think is also rare. Most people have some mix of equity asset classes which more likely than not, will give you better performance.

If we really want to take it to the extreme, then we can use Japan: what if you bought Japan at the high with all of your money and never bought/sold any other asset classes. It's a silly example, because nobody has ever done this, but we can model it and use it as a data point on why equities are bad. This example isn't any different than buy/hold US 2000-2013 (except that it probably performed better).

 

[NW-Bound]

This would also assume that your buy and holder owns only one equity asset class, which I think is also rare. Most people have some mix of equity asset classes which more likely than not, will give you better performance.

As a slicer-and-dicer, I do not own index funds but individual stocks or sector ETFs, so that I can see which is underperforming and also hope to see which is overvalued.

But all this balancing, whether between sectors like I am doing or between stocks and bonds, relies on market fluctuations to gain ahead. If everything is flat and just muddles through, how does anyone make money?