Why Dow 19,000 Isn't As Crazy As It Sounds

The Dow Jones Industrials (DJINDICES: ^DJI  ) have made an impressive bull-market run since the financial crisis. But by one measure, the Dow could easily climb to 19,000 or higher without achieving anything more than average status for a typical bull market by historical standards.

Putting the Dow into long-term context
Stocks have climbed back toward all-time record levels as the government's debt-ceiling crisis gave way to at least a short-term resolution. At its current level of 15,400, the Dow is just a few hundred points away from its current high-water park.

When you take a longer-term view, it's tempting to see the Dow as overextended and vulnerable to a pullback. The average is up almost 130% from its lows in early 2009, and it has been regularly setting new record highs throughout most of 2013.

Yet by historical standards, the 55-month-old Dow advance hasn't even reached the historical average of past bull markets. According to figures compiled by Nobel Prize winning economist Robert Shiller, when you look at the 15 previous periods featuring upward-moving markets lasting at least six months or more and gaining at least 50% from previous bear-market lows, you find that the average return was about 183%. Although those figures used the S&P 500 as a proxy, similar gains for the Dow would equate to a level of just under 19,000, based on the March 2009 low.

Moreover, for those who believe that a four-and-a-half-year bull market is getting long in the tooth, Shiller's figures concluded that the average bull market lasts more than 68 months. That would give the Dow until November 2014 to hit that 19,000 level. A 23% gain in just over a year would be aggressive but definitely not unheard of, especially in light of gains we saw during the mid- to late 1990s.

Dow 40,000?
Taking the historical context to the extreme of pure avarice, a bull market of the scope of the one that lasted from early 1988 to 2000 could lead to gains of more than 500%, taking the Dow above 40,000. Yet that bull market took almost three times as long to materialize as the current bull market has run, giving the Dow until late 2021 to reach that zenith. It would take annualized gains of between 12% and 13% to reach that figure in that timeframe -- again, ambitious but not impossible.

The one thing every investor should remember is that history doesn't guarantee any particular bull market will be average or above. But if you've been waiting on the sidelines, convinced that the bull market can't rise any further, history is full of counterexamples that would have proved you wrong in the past.

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