Dow 2,000,000 Is Closer Than You Think

by Nicholas Vardy

Editor’s Note: Today I’m delivering some bittersweet news for Investment U. Our former Managing Editor Samuel Taube is moving onward and upward as a correspondent on our Research Team. But not to worry, Sam’s passion for data analysis will continue to be woven into the fabric of the ideas you’ve come to know and love.

My name is Donna DiVenuto-Ball, and I’m the new Managing Editor of Investment U. As a recovering MBA who’s worked the Fortune 100 grind for the better part of my career, I’d say this is my renaissance.

Don’t get me wrong - the business education taught me how to think strategically (and understand finance), but my true passion lies with the written word and the generation of interesting, unconventional ideas.

If I’ve learned nothing else from my first few days on the job, it’s that our intrepid weekly contributors - Chief Investment Strategist Alexander Green, ETF Strategist Nicholas Vardy and Emerging Trends Strategist Matthew Carr - are anything but conventional.

And with that, I’m excited to bring you our latest issue...

"Dow just crashes through 25,000. Congrats! Big cuts in unnecessary regulations continuing."

- President Trump’s Tweet dated January 4, 2018

President Trump hasn’t been shy about taking credit for his role in the Dow hitting that investment milestone.

Whether you think Trump’s rise to power has anything to do with the current stock market rally or not, one thing is clear...

Since he was elected in November 2016, the Dow has shot up 36% and the S&P 500 has gone up 27%.

But the Dow was enjoying a remarkable decade even before the election of Donald Trump. Overall, the Dow has risen an eye-popping 286% since hitting bottom in March 2009.

With the granddaddy of U.S. stock market averages hitting new highs, investors are wondering how high the Dow can go.

The answer seems to be “a lot higher than you think.”

Famously “Crazy” Predictions About the Dow

The Dow has always held a special place in the minds of U.S. investors.

In 1999, James Glassman and Kevin Hassett published Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market.

Swept up in the fever of the dot-com frenzy, Glassman and Hassett wrote...

“Stocks are now in the midst of a one-time-only rise to much higher ground - to the neighborhood of 36,000 on the Dow Jones Industrial Average.”

Glassman and Hassett predicted that the Dow would hit 36,000 by 2002 or 2004.

As it turns out, their timing could not have been worse.

Instead of reaching a high of 36,000, the Dow hit a low of 7,286 in October 2002. The Dow eventually tumbled even below that level, dropping to 6,547 in March 2009.

Fast-forward a decade to 2018, and “Dow 36,000” doesn’t seem as outrageous as it did just 10 years ago.

As Glassman recently pointed out, since September 2015, the Dow is up more than 50%.

That means the Dow needs to jump only another 50% to get to 36,000.

Almost 20 years after its publication, the prediction of Dow 36,000 seems finally in sight.

The News Gets Even Better

As fanciful as Glassman and Hassett’s prediction seemed at the time, some current projections seem even more baffling at first glance.

Even Warren Buffett got into the Dow prediction game this past September.

Buffett said he expects the Dow to be “over 1,000,000” in 100 years.

Consider that the Dow stood at 81 around 100 years ago. That means the Dow has risen 300-fold over the past century.

Still, Buffett’s recent prediction of Dow 1,000,000 by 2117 pales in comparison to the one made by another investment legend, Sir John Templeton.

In 2001, Barton Biggs, former global strategist for Morgan Stanley, interviewed Templeton. In that interview, Templeton suggested that the Dow could hit 1,000,000 by 2099, nearly two decades sooner than Buffett’s date.

At first blush, Templeton’s prediction sounded absurd.

After all, the Dow was trading at around 10,000 at the time of the interview.

Templeton, however, was making a serious point.

He had calculated that the Dow would have to rise only about 4.8% per year to hit 1,000,000 over the next 97 years.

Perhaps more surprisingly, stocks would have to rise only 5.5% over that period to hit 2,000,000. The prospect of that happening by 2099 is no joke...

The Miracle of Compounding

I was initially taken aback by Templeton’s bold prediction.

That’s because the mathematics of the “miracle of compound interest” is hard for this linear-thinking hominid to get his head around.

But after I played with the numbers, I realized Templeton’s prediction was deceptively conservative.

Here’s why...

Since its inception in 1896, with dividends reinvested, the Dow has generated an average total annual return of 10.2%...

Even in the years following the recent financial crisis, the Dow returned an average of 9.1%...

These rates of return are much higher than the ones Templeton used for his calculations.

As it turns out, reinvesting dividends almost doubles your rate of return compared with the headline Dow number.

Let’s assume you invest in the Dow today at 25,000.

Furthermore, assume you reinvest dividends and the Dow generates its historical average return of 10.2% over the coming decades.

This “total return” would reach the equivalent of Dow 1,000,000 by 2057.

It would hit 2,000,000 a mere eight years later in 2065.

That’s a full 34 years ahead of Templeton’s 2099 prediction.

Now, you may be thinking, “Yeah, but this time it’s different.”

After all, the Dow is too expensive, Trump is unpredictable and China is eating our lunch.

Still, remember that the Dow’s historical average return over a period that included two world wars, the Great Depression and the Great Recession is more than 10%.

That’s why I believe Templeton is right.

Dow 1,000,000 and 2,000,000 are in the cards.

And unlike the prediction of Dow 36,000 in 1999, each is likely to come sooner than you think.

Good investing,


Thoughts on this article? Leave a comment below.

These Returns Show the Strength of Templeton's Track Record

As Nick noted above, Sir John Templeton is a legend in the investment community and one of the pioneers of global equity investing. Chief Investment Strategist Alexander Green is a self-proclaimed Templeton disciple.

Alex has recommended the Templeton Emerging Markets Fund (NYSE: EMF) in his Oxford All-Star Portfolio since 2002. It has returned more than 300% since then... and what Alex said about it in his Oxford Communiqué back in 2013 still holds true today...

Most Americans are understandably focused on what is happening in the U.S. economy and financial markets. But the most dramatic growth story is not here - it's overseas. In particular, developing nations cover 77% of the world's land area and represent 85% of the world's population.

In 1980, these countries accounted for just 30% of global economic growth. Today they generate more than half. (Not long ago, China surpassed Japan as the world's second-largest economy.)

Most - but not all - developing countries have moved from authoritarian governments to democratic ones. They have evolved from state-controlled economies to capitalist ones. They have privatized industries, reduced taxes and tariffs, and either set their currencies free to float or pegged them to the U.S. dollar.

These nations have superb investment potential over the next few years since a number of fundamental factors favor their economies. For instance, while Europe and the United States struggle with debt-to-GDP ratios of 100% or more - and Japan's ratio tops 250% - the fiscal balances of developing economies are generally favorable because their debt ratios are low.

These countries are attractive demographically too. Japan, for instance, will soon have as many non-workers as workers, and the United States and Europe are not far behind. But emerging market populations are young, technologically savvy, and motivated to get educated and start consuming, saving and investing.

In essence, we are in the midst of an unprecedented explosion, the emergence of a world middle class. And the investment implications are colossal. Yet I speak to many investors who say their emerging market exposure is somewhere between meager and nonexistent.

An easy remedy is the Templeton Emerging Markets Fund, a longtime member of our Oxford All-Star Portfolio.

- Donna DiVenuto-Ball with Alexander Green

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