Is "Dow 36,000" merely a reversion to the mean?

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Jack&Warren disciple
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Is "Dow 36,000" merely a reversion to the mean?

Post by Jack&Warren disciple »

Yesterday's nyt: "Twenty-two years ago this fall, a new book with the provocative title “Dow 36,000,” by James K. Glassman and Kevin A. Hassett, was published to great fanfare — and not a little derision.

U.S. stocks had been on fire. The technology and internet boom spurred a wave of day traders and investment mania that now seems quaint. But at the time, the Dow Jones industrial average index was hovering around 10,000. And even in those heady days, forecasting a near-quadrupling of the index appeared naïve at best and ridiculous at worst.

Today, the Dow is on the verge of reaching that mark, even with recent gyrations triggered by a cocktail of concerns about the Chinese property market, inflation and the U.S. debt ceiling. That doesn’t make the earlier prediction prescient: Had stocks simply averaged 7 percent a year — a benchmark commonly set by professional investors — the Dow should have hit 36,000 by 2018. While the trend has been up and up, the past two decades have been anything but smooth for stocks. Through the financial crisis and recessions of the past 20 years, along with periodic selling bouts, prices have oscillated wildly."

I've always thought a mean return on US equities was always about 8% as I planned for retirement over the decades, so today are we undervalued, at the mean, or overvalued or does it ever matter?
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arcticpineapplecorp.
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Re: Is "Dow 36,000" merely a reversion to the mean?

Post by arcticpineapplecorp. »

does the Dow factor in the reinvestment of dividends or merely the change in stock prices of 30 large cap US companies? (i.e., when dividends are paid the stock price falls by the amount of dividend paid. therefore if you don't account for the receipt of dividends and only look at stock price, you're missing a part of total return (could be as much as a 1/3rd of your total return coming from dividends). Not to mention it's only 30 stocks. Not to mention it's only large cap stocks so not representative of the total market. Not to mention the way the Dow is calculated is quirky and we shouldn't be following it anymore (see links below).

if not, using the Dow is not a good a measure of total return is it?

https://www.npr.org/sections/money/2012 ... ut-the-dow
https://www.npr.org/sections/money/2017 ... e-the-hype
Last edited by arcticpineapplecorp. on Tue Oct 19, 2021 8:18 am, edited 1 time in total.
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burritoLover
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Re: Is "Dow 36,000" merely a reversion to the mean?

Post by burritoLover »

I don't think that book was talking about waiting 20 years for the Dow to hit 36,000 - rather that it would relatively quickly back then. So, the fact that we are now near that level has no significance to anything.

This is also the problem with cherry picking time periods - of course, choose the start date at the greatest bubble in modern times and it is going to have an impact on your results. You could have just picked the peak of the dot com bubble and then the trough of the GFC and you would be in negative territory - also meaningless.
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Re: Is "Dow 36,000" merely a reversion to the mean?

Post by MotoTrojan »

Jack&Warren disciple wrote: Tue Oct 19, 2021 8:07 am
I've always thought a mean return on US equities was always about 8% as I planned for retirement over the decades, so today are we undervalued, at the mean, or overvalued or does it ever matter?
Long-term real return (after inflation) for the US is closer to 5% than 8% if memory serves, and that is a huge outlier with the rest of the world in the 3-4% realm. I just say this so you can reset your retirement planning as assuming 8% returns for 100% equities while possible, is not a given.

As to under/mean/overvalued, the US is undeniably historically expensive, but that doesn't necessarily mean it is overvalued; what it does mean is that future expected returns are much lower than they have been historically. Some people believe earnings will grow much faster than they have historically, and returns will still be exceptional (average surveyed US investor expects 15%... ya right) but I don't find the evidence there compelling. Again, this doesn't mean it is overvalued and due for a huge crash... it could be perfectly fairly valued, but with the understanding that the next 10-20 years will have below average returns (perhaps also with below average risk).
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Jack&Warren disciple
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Re: Is "Dow 36,000" merely a reversion to the mean?

Post by Jack&Warren disciple »

MotoTrojan wrote: Tue Oct 19, 2021 8:22 am
Jack&Warren disciple wrote: Tue Oct 19, 2021 8:07 am
I've always thought a mean return on US equities was always about 8% as I planned for retirement over the decades, so today are we undervalued, at the mean, or overvalued or does it ever matter?
Long-term real return (after inflation) for the US is closer to 5% than 8% if memory serves, and that is a huge outlier with the rest of the world in the 3-4% realm. I just say this so you can reset your retirement planning as assuming 8% returns for 100% equities while possible, is not a given.

As to under/mean/overvalued, the US is undeniably historically expensive, but that doesn't necessarily mean it is overvalued; what it does mean is that future expected returns are much lower than they have been historically. Some people believe earnings will grow much faster than they have historically, and returns will still be exceptional (average surveyed US investor expects 15%... ya right) but I don't find the evidence there compelling. Again, this doesn't mean it is overvalued and due for a huge crash... it could be perfectly fairly valued, but with the understanding that the next 10-20 years will have below average returns (perhaps also with below average risk).
No one really knows exactly what will happen in the future, but as I look at the quality of the corporations I own via the VTI, I think many of these companies will be providing needed services and goods to consumers and that should be reflected in positive returns if done profitably over the long term.
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Re: Is "Dow 36,000" merely a reversion to the mean?

Post by MotoTrojan »

Jack&Warren disciple wrote: Tue Oct 19, 2021 9:06 am

No one really knows exactly what will happen in the future, but as I look at the quality of the corporations I own via the VTI, I think many of these companies will be providing needed services and goods to consumers and that should be reflected in positive returns if done profitably over the long term.
Best of luck! There are countless examples of wonderful companies with bad prices providing a decade or more of flat returns, while revenues increased by several multiples.

Microsoft 2000-2013.

The Nifty Fifty.

Also to your exact point, these are quality corporations "providing needed services and goods to consumers and that should be reflected in positive returns if done..." I totally agree... so does the market. So perhaps that is why it is pricing them (and thus the cap-weighted US market) for lower future returns.

So yes, you'll get a positive return, but 8% (at-least in real terms) is not likely for the next decade at-least. At a minimum, I would use a lower number for your retirement planning and be pleasantly surprised if I am wrong.
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Re: Is "Dow 36,000" merely a reversion to the mean?

Post by z3r0c00l »

Image

Nothing too shocking about the 200+ year trend continuing for at least a little longer. I expect 72,000 before 2050.
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Re: Is "Dow 36,000" merely a reversion to the mean?

Post by rantk81 »

Considering that Dow30 is a price-weighted index (which means something as simple as one of the companies doing a split could have a decent impact on the index), and considering that the components of the index have been swapped in-and-out several times over this time period... I think it's pretty safe to say that the index number isn't really useful, and discussions of various levels of numbers attained in the index (especially over a long'ish time period such as 20 years) are pretty meaningless.
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Re: Is "Dow 36,000" merely a reversion to the mean?

Post by randomguy »

MotoTrojan wrote: Tue Oct 19, 2021 8:22 am
Jack&Warren disciple wrote: Tue Oct 19, 2021 8:07 am
I've always thought a mean return on US equities was always about 8% as I planned for retirement over the decades, so today are we undervalued, at the mean, or overvalued or does it ever matter?
Long-term real return (after inflation) for the US is closer to 5% than 8% if memory serves, and that is a huge outlier with the rest of the world in the 3-4% realm. I just say this so you can reset your retirement planning as assuming 8% returns for 100% equities while possible, is not a given.
Since 1920 the average real return 9.5% and the average CAGR was 7.6%. The US results are pretty similar to most counties that weren't leveled or had a revolution. Granted that is a pretty small list.:)
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Re: Is "Dow 36,000" merely a reversion to the mean?

Post by MotoTrojan »

randomguy wrote: Tue Oct 19, 2021 9:50 am

Since 1920 the average real return 9.5% and the average CAGR was 7.6%. The US results are pretty similar to most counties that weren't leveled or had a revolution. Granted that is a pretty small list.:)
Not sure what these values are. CAGR is the only thing worth reporting (naive average return says nothing), of which there is a real and nominal version. Not sure which CAGR this is, nor why the real return cited is larger.
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Re: Is "Dow 36,000" merely a reversion to the mean?

Post by nisiprius »

"Dow 36,000" was based on a very specific argument. It's quite explicit although I don't have the time to reference exact quotations now.

1) Jeremy Siegel, author of Stocks for the Long Run, showed that stocks are not actually any riskier than bonds.

2) The prices of stocks used to be low because investors thought stocks were risky and demanded an equity risk premium, i.e. would not pay very much for them, because of the risk.

3) As knowledge of Siegel's work spread through the investing community, the equity risk premium would disappear and stocks would rise to their "perfectly reasonable price," which implied Dow 36,000.

4) They stated that this would happen no later than 2005, but might happen much sooner.

The failure of the market to reach Dow 36,000 by 2005 shows that the market never accepted the idea that stocks were as safe as bonds, and the equity risk premium did not disappear.
Last edited by nisiprius on Wed Oct 20, 2021 10:35 am, edited 2 times in total.
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Jack&Warren disciple
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Re: Is "Dow 36,000" merely a reversion to the mean?

Post by Jack&Warren disciple »

nisiprius wrote: Tue Oct 19, 2021 7:02 pm "Dow 36000" was based on a very specific argument. It's quite explicit although I don't have the time to reference exact quotations now.

1) Jeremy Siegel, author of Stocks for the Long Run, showed that stocks are not actually any riskier than bonds.

2) The prices of stocks used to be low because investors thought stocks were risky and demanded an equity risk premium, i.e. would not pay very much for them, because of the risk.

3) As knowledge of Siegel's work spread through the investing community, the equity risk premium would disappear and stocks would rise to their "perfectly reasonable price," which implied Dow 36000.

4) They stated that this would happen no later than 2005, but might happen much sooner.

The failure of the market to reach Dow 36000 shows that the market never accepted the idea that stocks were as safe as bonds, and the equity risk premium did not disappear.
Very insightful thanks, I recall that during the 1990's bonds were quite volatile in pricing at times, more so than equities, this may have helped Jeremy Siegel to conclude 1. above. Going long on stocks over decades in index funds has allowed me to avoid the market volatility noise and reap the rewards of the risk premium.

But we've just seen how volatile equities can be, cratering some 30% to 40% in March 2020 and roaring back 80% to 100% from there. I've always assumed that equities will revert back to the mean eventually and it seems to work, so far...
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Re: Is "Dow 36,000" merely a reversion to the mean?

Post by nisiprius »

First of all, the DJIA has not reached 36,000 yet. I feel sure it will, but a number of financial writers have been jumping the gun.

The important thing is that Glassman and Hassett's actual words, in their book and also in interviews and articles, were
A sensible target date for Dow 36,000 is early 2005, but it could be reached much earlier.
The didn't say "it will reach 36,000 someday," nor does it reaching 36,000 in 2021 mean, in the words of a WSJ headline, "the Dow 36000 Forecast Was Right."

In elementary school one day, Your Weekly Reader had an article mentioning that the last Union soldier had died, but that three Confederate soldiers were still alive. Some students argued that this meant that the South had won the Civil War.

The South did not win the Civil War, and Glassman and Hassett's forecast was wrong.

With regard to their specific point--that the equity risk premium would vanish due to investors now understanding that stocks were no riskier than bonds--Dow 36,000's Stock Picks summarizes the argument using verbatim quotes from the authors.

Most of the thread is about their comments on stock picking. They say one way to put their theories into practice
is to put all of it into a Wilshire 5000 index, such as Vanguard Total Stock Market Fund. That's acceptable to us, but it's not ideal.
Instead, they identify by name "three [stocks] that illustrate the Dow 36,000 Theory in practice:"
  • General Electric ("GE is increasing its dividends at twice that pace... [in mid-1999] it was by our conservative standards trading two-thirds below its perfectly reasonable price.")
  • Microsoft ("meets the Schlang criteria with ease.")
  • and Tootsie Roll. ("We're still dazzled by Tootsie Roll.... could triple before bursting out of our comfort zone.")
The rest of the post comments that at the time, 2012, not one of their three stocks had outperformed the Total Stock Market Index fund. a later post update it through January, 2021. By then, which time Microsoft had pulled well ahead of Total Stock--but not GE, Tootsie Roll, nor a portfolio of the three.

So they were wrong about that, too.
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Re: Is "Dow 36,000" merely a reversion to the mean?

Post by itsmeagain »

It seems that Dow 36,000 was too much and too fast, even 22 years after it was "called"!

And a "double top" no less, in November 2021 and January 2022, for those who like technical analysis. (Not me.)
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