Will the Dow Soar or Plunge in 2013?

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The New Year is finally here, and after a reasonably good performance for the Dow Jones Industrials (DJINDICES: ^DJI  ) in 2012, investors are hoping for more of the same as the bull market tries to go beyond the four-year mark. Yet while some market prognosticators think the market has plenty of room to run, others are placing their bets on a pullback.

Let's take a look at a couple market analysts and the calls they've made, along with the justifications they've advanced for their opinions. At the end of the article, you can weigh in with your own views in our Fool poll, and leave a comment with your exact prediction for where the Dow will end 2013.

Jeremy Siegel: Bet on Dow 17,000 in 2013 
Jeremy Siegel has been a long-term bull on the stock market for a long time. The Wharton finance professor has made the stock market his life study, looking at the history of stocks going back a couple of centuries.

Siegel argued back in October that the fiscal cliff would inspire unusual cooperation across party lines in Congress, with tax and entitlement reform. Yet he wasn't unrealistic with his expectations about timing, as he believed that a one-year short-term extension would give politicians time to move forward with more dramatic law changes.

Meanwhile, Siegel thinks that growth in the U.S. economy will accelerate to a 3% to 3.5% annual pace, thanks largely to housing and consumer sentiment. If the economy can ignore dysfunctional politics, then business activity could make the case for a rising market all by itself. Adding simplicity to the tax code through eliminating deductions could allow tax rates to fall while still addressing the U.S. budget issues.

What sets Siegel apart from many of his bullish peers is that his analysis takes the truly long-run view. He bases his current view that the stock market is cheap less on quarterly earnings or economic forecasts and more on the fact that he's never seen a 20-year period in which inflation-adjusted returns on U.S. stocks were below zero, and most of the time, stocks have beaten alternatives like bonds and gold soundly over those two-decade periods. With the Dow below its long-run average, Siegel irons out the daily rises and falls of the market and argues that long-range strategy supports owning stocks.

Harry Dent: Dow could drop as low as 3,000 
Harry Dent is no stranger to big predictions. In a 1993 book, The Great Boom Ahead, Dent argued that demographic trends would support huge gains for stocks as members of the baby boom generation entered the highest-consumption years of their lifetimes. Yet now, according to Dent, those trends are reversing themselves, as baby boomers have grown older and shifted away from consumption and toward saving. He sees the Dow falling to between 3,000 and 5,000 in a coming crash.

Meanwhile, even as the Federal Reserve has tried encouraging more spending and discouraging saving with low interest rates, it has also tried to stop what Dent sees as a painful but necessary deleveraging that will make traditional elements of standards of living like housing affordable to young families. Dent believes that these downward trends will last until 2023, when the so-called echo boom starts to perk up again.

To be fair, Dent isn't certain the crash will come in 2013, and he wrote The Great Crash Ahead back in 2011. But he does think something should happen in the next two to three years, and he told Bloomberg back in September that he expected to short the market in December or January. Moreover, although he thinks emerging markets have better demographics, he doesn't think they'll fare much better given the close links among global economies. That's certainly consistent with what happened in 2008, when iShares FTSE China (NYSEMKT: FXI  ) , Templeton Russia and Eastern European Fund (NYSE: TRF  ) , and iShares MSCI Brazil (NYSEMKT: EWZ  ) all posted losses in line or even worse than the S&P 500 (SNPINDEX: ^GSPC  ) .

Dent isn't alone in his views that demographics are important; Robert Arnott has also clued into the importance of the aging population in his market views, which he shared with Fool contributor Morgan Housel recently. Much depends on how the U.S. government responds to the many challenges that demographic issues raise.

Where will the Dow finish 2013?
Most of the time, extreme views turn out to be wrong. Seeing the Dow rise to 17,000 or fall to 3,000 would both be low-probability events, albeit within the realm of possibility. More likely, though, the end of the year will put us somewhere in between those two views.

What do you think? Weigh in by answering the poll below, and give us your more precise estimate in the comments. May the New Year make your investing expectations come true!

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Read/Post Comments (3) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 01, 2013, at 10:43 PM, vaderblue wrote:

    I believe predicated on slow growth we will have growth in the market instead of decline. Earnings are good. I like 2012 results of Spy, SSO, UPRO. I am expecting the S&P to 1580 by year end 2013.

    That will be awesome. 2012 with Europe holding our markets hostage in and out. We will do better this year for the market will survive and grow. I like equities, commodities and materials. Fun article, fun to write about. I am very analytical and I turned over 18% last year in my portfilio and 2013 I am expecting 20 to 28% and I am diversified.

  • Report this Comment On January 15, 2013, at 4:20 PM, Deafinvestor wrote:

    Congratulations on your portfolio. That is very impressive.

    I have found that to be an successful investor you have to be deaf to the noise, and blind to all of the irrational movement. As Peter Lynch said there is more to the emotional aspect of investing than the technical part of it. you have to have an Iron gut otherwise you will get motion sickness. (my quote)

    The great thing about being a fool is that it gives you the peace of mind knowing that the foolish brothers have done their research, have a proven track record and all I have to do is, stop listening to the noise, have the Iron gut and not sell when my stock goes down, but buy instead when the BDM, Big Dumb Money says our great investment is not any good, buy and watch it go back up when tomorrow the BDM says its the best thing ever. Thats when you sell!

    Anyway, Good luck with your return this year and stay the course when it feels like you shouldnt.

  • Report this Comment On January 25, 2013, at 7:51 PM, TryEatAUha wrote:

    A. The markets will be flat given that many companies are overvalued and many others undervalued, thus canceling each other out over a longer period.

    B. The investors leaning towards a 17 000 DJIA in 2013 would be right if their where no outstanding known catalysts outstanding: Spring/summer US debt ceiling, Greece’s bankruptcy that will take place sooner or later, (when is anyone guess) Japan’s deleveraging, historically high number of people using food stamps (this tells you the real non-Gov. unemployment rate) and with ultra-low interest rates what 99 presenter’s (the average) is not already neck high in debt?

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