No, I haven't jumped ship since asking "What's next? Dow 5,000?" I'm still pessimistic. Borderline cynical. The financial industry is still an utter mess, despite Citigroup's (NYSE: C ) illusory insistence that it's profitable. Until the Treasury comes out with a financial plan with a backbone, banks will wallow, and stock indices probably won't be too far behind.
I say "probably" because, honestly, no one has a clue. As Warren Buffett recently wrote to Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) shareholders, he and Charlie Munger are "certain ... that the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall."
Up, down, sideways, inside out ... no one knows. That's what keeps people intrigued.
Oh, come on!
Just don't tell that to the zillions of market forecasters who took Tuesday's 5.8% rally as a sure sign things have bottomed and turned a corner. "This is one fantastic rally," Jim Cramer said (screamed), "that's not over yet!"
Maybe he's right. I can't blame the enthusiasm. After being thoroughly maimed over the past six months, you take what you can get, regardless of size. I'll remind you that Tuesday's "recovery" rally didn't do much more than erase the Dow's losses since, well, last Tuesday.
That last point got me thinking. When people get fired up over the Dow "exploding" to 7,000, you realize how far the goalpost has been moved. I vividly remember the grief of watching the Dow break below 10,000 just a few months ago. Today, the prospect of Dow 10,000 would feel like winning the lottery. Yesterday's terror is tomorrow's utopia.
Now the numbers
So how much would it take to get back to Dow 10,000? Using 7,000 as a base, here's how long it'd take to get back into five-figure Dow territory under different assumptions:
|
Compound Annual Return
|
Years to Hit Dow 10,000
|
|
5%
|
7.4
|
|
10%
|
3.8
|
|
15%
|
2.6
|
|
20%
|
2.0
|
If we bottomed today and earned a steady 5% per year going forward, we'd be back into Dow 10,000 territory by ... 2016! The beauty of compound returns are devilish when spun in reverse: lose 50%, and you have to gain 100% to get back to par.
Now some good news
Admittedly, after falling as ferociously as we have in such short order (on an equal-time basis, we've fallen as hard as during the Great Depression) the odds that we'll eventually rebound in a big way are better than the odds we'll slowly inch higher. To quote Buffett again, "What is likely ... is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up."
In fact, time and time again, the biggest market gains come directly after the biggest busts.
Have a look:
|
Year
|
Loss
|
Gain in Following Year
|
|
1932
|
(20%)
|
76 %
|
|
1937
|
(34%)
|
18%
|
|
1974
|
(18%)
|
39%
|
|
2002
|
(19%)
|
30%
|
No one knows when, and no one knows how much, but the trend over history is pretty straightforward: After huge crashes come huge rallies. And while I still think our trajectory is heading toward Dow 5,000, I (a) admittedly don't really have a clue, and (b) will be the first to admit that some incredible bargains can be found in today's market.
For example, take a look at Philip Morris International (NYSE: PM ) . The cash-cow international tobacco king currently yields well over 6%. Its former parent, Altria Group (NYSE: MO ) , pays a 7.7% dividend -- a dividend that has been paid for decades. Metal stocks like Alcoa (NYSE: AA ) and ArcelorMittal (NYSE: MT ) might have a few abysmal years ahead of them, but they're trading like the world is never going to build anything ever again. Investors are taking current conditions and extrapolating them into infinity, which has never, and will never, make sense.
Bottom line
It's terrible out there. It'll probably get worse before it gets better. But weigh three factors together:
- Things will get better. We just don't know when.
- Markets have tanked so quickly that when things do get better, stocks could explode. I mean really. Explode.
- When they do, we'll look back at today's prices and laugh at ourselves.
Dow 5,000? Dow 10,000? You shouldn't fear or hope for either. Both are out of your control and your prognostic ability. A rational way to look at it is this: One represents opportunity; the other is the outcome of that opportunity.
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