“Dow 40,000.”
We’re not just talking about the index level.
It’s also the name of a book.
Written in 1999 by David Elias of Elias Asset Management.
The book predicted the Dow would hit 40,000 by 2016.
It didn’t. Not even close.
Seven years later, the Dow is now less than 10% away from that target.
That means next year, 40,000 is in play. So, will it get there? We’ll share our take below, after this…
Market Data
The S&P 500 closed down 1.4% to end the day at 4,700.94… the Nasdaq fell 1.4% to close at 14,786.49.
In commodities, West Texas Intermediate crude oil trades at $73.83, up 25 cents…
Gold is $2,044.90 per troy ounce, down $8.80…
And bitcoin is $43,562 up $1,287 from yesterday.
Now, back to our story…
Don’t Be So Quick to Mock
Here’s the book in question… pride of place on your editor’s bookshelf!
It’s easy to mock such forecasts. It was especially easy to mock it in October 2002 when the Dow had fallen to around 7,400.
It was easy to mock it again in March 2009 when the Dow had fallen again… then to around 6,500.
But today, with the Dow above 37,000… it doesn’t look so crazy… even though we’re seven years past Elias’s 2016 target date.
And in fact, when you look at Elias’s rationale for how the Dow could have gotten to 40,000 from 1998 to 2016, it’s not that unreasonable.
Check out the table below with selected years (adapted from Elias’s book). As you can see, at 8% annual growth, the Dow would have hit just under 36,000 by the end of 2016…
… And with 9% annual growth, it would have surged past 40,000 by 2016.
Of course, the mistake in the analysis and the theory is assuming markets only ever go up, without any dips and crashes. So it all depends on the timing of the prediction.
If Elias had written the book in 2009… at the beginning of a bull market, rather than nine years earlier at the end of a bull market… and he’d made the same forecast about the Dow, folks would likely label his book as one of the most prescient of all time.
To illustrate, here’s how that table could have looked. We’ve added two columns to show additional growth rates to get us to where we are in 2023…
Right now, the Dow is around 37,500. That’s an approximate growth rate of 13.5% since 2009.
Aside from the Covid crash-and-rebound in 2020, the markets have mostly gone in one direction. The Dow is now even above its previous 2022 high.
So, what does it tell us?
For a start, if the market continues to grow at the current rate, we’re looking at the Dow hitting somewhere around 50,000 in 2025.
To the average investor today, that may seem crazy or unbelievable. And maybe it won’t happen. But as we showed you yesterday, at least one of our analysts, Teeka Tiwari, believes markets will boom over the next two years.
If he’s right, that can only mean the market will be higher then than it is now. Thirteen percent per year for the next two years. Does that really seem so outlandish when you look at it in isolation?
That’s not to say it will happen without some bumps along the way… if it happens at all.
But often it’s too easy to dismiss such forecasts as unrealistic and “out there.” Much in the same way that Teeka’s forecast for bitcoin to hit $500,000 may seem “out there” when he predicted it a year or more ago.
But does it still seem so crazy when the bitcoin price has more than doubled since the start of the year? Maybe. Maybe not.
The inability to understand compounding growth rates is one of the biggest reasons for failure by investors. It’s often the thing that kicks them out of the market too early or prevents them from getting in at all.
They’d rather wait until stocks get cheaper. They often end up waiting forever… And then still don’t get in when prices fall because they’re scared the market will keep falling.
But we get it. The numbers – especially when the compounding starts to really kick in – look too outrageous to be believable. But ultimately, it’s math.
If we expanded the table above further, to show you where the Dow would be 10 years from now, it would look even crazier. At a 13% annual growth rate through 2033, the Dow would hit over 122,000 index points.
That’s a number that feels hard to imagine. Of course, as we mentioned before, that assumes the market only goes up.
And we know the market doesn’t only go up. It goes down, too…
It’s All in the Timing
If only it were as easy to say “buy,” and to heck with the timing.
If you have a 30-to-50-year investment time horizon, that’s probably fine. But for most folks, their investment time horizon is much shorter than that.
That’s why the timing and strategy are important. Both Teeka Tiwari and another of our analysts, Phil Anderson, believe some of the best market gains will happen over the next two years.
Each of them has a different way of playing that. Phil is a trader. He takes a position in the market and then lets it ride. The trade could play out over months or even years.
As part of his risk management, he uses stop losses. If the stock falls to a certain level, he gets out.
Teeka uses stop losses too. But he also makes use of what he calls “asymmetric bets.” That is, he recommends investors have a core holding of relatively safe dividend-paying large-cap stocks.
He then suggests investors take the cash flow (dividends) from those stocks and invest it in “asymmetric” investments. Those are investments that offer the potential for outsized returns — e.g. cryptocurrencies.
The beauty of a strategy like that is even if the asymmetric bet falls to zero, you still have the safety of your large-cap dividend-paying stock portfolio.
But if your asymmetric bet pays off, returning two, three, four, or five times your money (or more), you supercharge your investment without taking unnecessary risks.
That’s relevant here because it means you have the chance to benefit from what could be the late stages of the bull market without necessarily allocating a large chunk of your portfolio to growth stocks or the Dow.
The yield on the Dow is around 1.9%. But there are plenty of other stocks out there offering a better yield, making Teeka’s strategy easier — and potentially safer — to implement.
The best thing is if you decide you don’t want to take on more risk… that you don’t want to make further asymmetric bets… you don’t have to.
You can just pocket the dividends and take the cash or reinvest the dividends into your portfolio of “safe” stocks. If you’re not following this approach already, we strongly recommend putting it into practice.
It’s the Top!
And yes, we’re fully aware that grabbing a book titled “Dow 40,000” and brandishing it around as the market hits a new high could in itself be a sign that it’s the top of the market.
So, feel free to bookmark this email and send it back to us a year from now… if the Dow is back at 20,000.
You have our permission to do so. Not that you need it.
Weber’s Own Report Card
Two weeks ago we revealed our plans to publish a “report card” next year. That’s where we’ll grade each of our services. You can expect the first part of that report card series on January 26.
Well, our newest editor, Chris Weber, this week published his own “report card” for his subscribers. As he mentioned when introducing the results:
In the next few weeks, we’ll all be seeing a bunch of forecasts for 2024. But how many of these forecasters will keep track and tell you how well, or poorly, they’ve done at the end of next year? Based on experience, almost none will.
And few things bother me more than this lack of personal accountability. To me, it means an ego run so big that the owner simply does not want to admit he made a mistake. And big egos are the enemy of good investing: if you can’t admit you made a mistake, big gains can easily evaporate, never to be seen again. I’ve made a practice, in the last issue of each year, to revisit any forecasts made in the year’s first issue.
It’s impossible to disagree with any of that. We won’t reveal the full details of Chris’ report card here. We’ll let his subscribers catch up on it first.
But to summarize, he was disappointed with his call on the Nasdaq (he was bearish)… But he nailed interest rates and gold for good profits.
We’ll include more details on the performance of The Weber Report and our other publications in our full report card next year.
Merry Christmas
That’s it for the Daily Cut this year. We hope you have a Merry Christmas and a Happy New Year.
Thank you for all your feedback and letters. It has been great to get to know you. Please keep them coming. Remember, you have my personal email address: [email protected].
Over the next couple of weeks, we’ll re-run some “best-of” essays from The Daily Cut this year. We’ll be back to our normal schedule on January 3.
If you have any suggestions about areas you would like us to focus on more next year, just email me. As we’ve mentioned before, we can’t reply, but we do read each one.
Once again, thank you for being a subscriber to Legacy Research.
More Markets
Today’s top gaining ETFs…
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Hull Tactical US ETF (HTUS) +2.2%
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Point Bridge America First ETF (MAGA) +1.6%
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First Trust Long Duration Opportunities ETF (LGOV) +0.6%
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Krane Shares China Credit Index ETF (KBND) +0.5%
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iShares 7-10 Year Treasury Bond ETF (IEF) +0.5%
Today’s biggest losing ETFs…
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Invesco Dorsey Wright Healthcare Momentum ETF (PTH) -3.8%
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SPDR Kensho Clean Power ETF (CNRG) -3.5%
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WisdomTree India Earnings Fund (EPI) -3.3%
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Global X MSCI China Consumer Discretionary ETF (CHIQ) -3.2%
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Franklin FTSE India ETF (FLIN) -3.2%
Mailbag
If you have any questions or comments for our experts here at Legacy Research, we’d love to hear from you.
Write to us at [email protected] and just type “Daily Cut mailbag” in the subject line.
Cheers,
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Kris Sayce
Editor, The Daily Cut