A Dow Double in 10 years? Easy

The other day, money manager Neil Hennessy provoked outrage when he suggested that the Dow Jones Industrial Average would double in ten years. People went apoplectic, judging by the comments below that video. I'm defending his call not because I'm all that bullish on equities, but because a rational breakdown of the index shows he's likely right. The screaming from the bears (those who think we're headed lower) is as light on actual analysis as is the hype from stock promoters who think we're always headed higher(without offering a good reason).

Hennessy runs Hennessy Advisors, an investment company in gorgeous Marin County, California, home to some of the world's loveliest oak trees. Among Hennessy's points:

"Why put your money into a 30-year U.S. government bond at 4% and wait 30 years to get your money back?"

Before I defend his view, I will say the one major issue I have with his rationale is that I think interest rates are likely to go up. Probably up significantly, which will offer another place (besides equities) to put money. That said, his call for the DJIA to double is completely rational.

To put it in perspective, a doubling of the DJIA in ten years means it only has to grow 7.2% annually. Not a guarantee but certainly not outrageous.

The DJIA's dividend yield alone, will get you 1/3 of the way to a 100% gain:

click to enlarge

OK, the dividends get you about 3,221 points over ten years - that leaves us with 6,553 (give or take) to get to a double, or 19,507.

Let's take earnings growth. 2010 earnings-per-share estimates for the DJIA companies are 162% higher, on average, than earnings-per-share 10 years ago. Importantly, the top ten DJIA stocks, accounting for 53% of the index weight, grew earnings-per-share at 249%.

To get that 6,553 points for a Dow Double (to add to the 3,221 from dividends), it only takes 48% earnings growth (and a PE of 15) over ten years to get there -->> far less that the previous decade's growth. And if you look below at my simple analysis, it shows stock price gains of only $10 for Cisco (CSCO) and $8 for Intel (INTC) -->> laughably conservative.

Anyone reading my site knows I'm a skeptic of things going forward. There's a "new normal" in unemployment closer to 8-9% over the long run, that will badly crimp the 70% of our economy tied to consumer spending. We've got ridiculous debts, and out-of-control government spending. But a Dow Double is ten years is not only not outrageous, it's probably conservative.

Disclosure: long DIA, CSCO

Comments

[Michael D.:]

Start your 10 years from March 2009 and leave GE and the banks out of it. I'm up 50%, so it should be less than 10 years to get the next 50%.

Oct 07 11:59 AM

[Kup:]

I'm afraid dividend payouts do not materially affect the level of the stock market. They can payout 2.9% forever and that does not mean the market will ever go up. What is termed "dividend performance" in the provided graph should not be assumed to have a 1:1 ratio with equity prices. Dividend payments for the S&P from 1970-1980 averaged 4.29%, and the S&P was flat.

Oct 07 12:17 PM

[Graham and ...:]

The average annual total return on the Dow in the 20th century was something like 11%. That's certainly more than 7.2%

But this 11% is composed of stretches, like 1982-1999 of 18%-20%, and other stretches, from 2000-2017(?) of 2%-4%.

Most of the next ten years will be in the 2%-4% stretch. It's possible that the last three years could pull up the average to 7.2%, but that's not a given.

A doubling of the Dow was "almost" a given from say, 1989 to 1999.

Oct 07 01:33 PM

[Larry House:]

It may sound easy enough, but don't underestimate the long-term economic problems we face. Other "experts" who manage billions of dollars are predicting growth of 1-3% for the next few years--a good-sized chunk of the 10 years. Beyond that, we may face high inflation. On top of all, we have growing budget deficits. Stocks will have a hard time averaging 7.2% per year with that backdrop. I hope it happens, but I don't expect it.

Oct 07 02:13 PM

[HomeEconomics:]

It's certainly possible if this deflationary cycle ends within a few years, but calling it "easy" is being too dismissive of what happened in Japan. I bet there were similar predictions there when the Nikkei crashed and it turns out that it is even lower today than after that crash.

Oct 07 02:34 PM

[Missiondweller:]

It may be entirely possible if you start thinking in terms of asset inflation. At the rate were printing money everything will be higher in price but not necessarily in value.

I can imagine the Dow doubling in that period. I can also imagine gold tripling in that same period.

Oct 07 04:21 PM

[E.D. Hart:]

If you look at the ratio of Dow to gold, bear markets bottom at a ratio of 1:1. I think that Gold $5000 is possible, DOW 5000.

Markets trough at PEs of 5 or 6, not the current 16-17. We have a potentially large correction of 40%-50% ahead.

I'm not saying it will happen, only that it is possible, and historically analogous to current times.

If I had to bet a dollar I'd say DOW 5000 is more likely than DOW 20,000. Something to think about.

Oct 07 07:18 PM

[boisterousbob:]

Inflation will help the dow doubling case. Stocks are commodities priced in dollars. If the value of a dollar falls (inflation) the price of a stock expressed in dollars will go up more quickly.


On Oct 07 02:13 PM Larry House wrote:

> It may sound easy enough, but don't underestimate the long-term economic
> problems we face. Other "experts" who manage billions of dollars
> are predicting growth of 1-3% for the next few years--a good-sized
> chunk of the 10 years. Beyond that, we may face high inflation.
> On top of all, we have growing budget deficits. Stocks will have
> a hard time averaging 7.2% per year with that backdrop. I hope it
> happens, but I don't expect it.

Oct 07 07:30 PM

[tripleblack:]

Yes, inflation will accomplish what other factors will fight, even high taxes or hostile business climates.

The problem is not that the market cannot hit 7.2% growth each year, but that inflation is likely to be even higher, even if the dollar stabilizes, which few believe will happen.

Now, if the idea is to have 10% REAL growth, every year for the next 10 years, after inflation or currency destruction, yes, that WOULD be quite an accomplishment.

Oct 07 08:49 PM

[untrusting ...:]

Your only up 50% if you don't lose it in yet another downleg. Would not count your chickens before they hatch. Gains only count when you cash them in and turn them into realized gains.


On Oct 07 11:59 AM Michael D. wrote:

> Start your 10 years from March 2009 and leave GE and the banks out
> of it. I'm up 50%, so it should be less than 10 years to get the
> next 50%.

Oct 07 09:58 PM

[Jason Rines...:]

seeking alpha management. If you want help to block this idiot ruining your site and wasting investors time then call me. 603 953 3388. I own a network and will return value for the years of wonderful and educational content.

As to my forecast I stick with the W shape event with 2nd leg down in 2011 which I have been stating here since summer of 2008.

Getting the signal yet from our creditors overseas? We're due for a pullback but don't believe it will be Dow 5000 nor this month or next.
The tbtf banks are floating on a sea of reserves. 2010 is an election year and one of importance for Senate Banking Oversight. The technicals are so unplugged from fundamentals your best watching Washington CSPAN.

Jason Rines


On Oct 07 08:09 PM myspacestocks wrote:

> this market always goes up. that's all it does, end of story.
>
> hat tip to: tinyurl.com/n854tt for the good articles

Oct 07 10:55 PM

[Moon Kil Woong:]

Much of the expectation in earnings growth is already valued into this market. If we get anemic earnings growth stocks will go down not up. The only major reason why I would agree with his premise is if he assumes that the dollar will depreciate 5-10% a year like it is this year, then the Dow only has to hold its own relative to the depreciation to double. With a lot of Dow firms deriving some component of their revenues from overseas that shouldn't be hard to accomplish.

With Bernake at the helm, persistent dollar depreciation is a very high probability.

Oct 07 11:17 PM

[Edward, Lor...:]

You may double your dollars, but they'll only buy half as much. t-bills are a mug's game. The government is the dealer and you are the sucker.

Oct 08 10:38 AM

[mbkelly75:]

I thought Neil Hennessy made a good point. It will be interesting, at the very least, to see who is right over the coming years.

Oct 08 11:56 AM

[E.D. Hart:]

Check out graphs of the Nikkei falling from PE of 80 in 1989 to less than 15 today. Earnings rose at a un-constant rate over the last 20 years--but due to debt deleveraging--the PE fell by more than 2/3.

Nikkei--39,000 in 1989 to 9,832.47 today.

Couldn't happen here right, because that's Asia--like a different planet.

But wait, housing prices don't always increase--sometimes they decrease for a decade or more. Virtually no one talked about that before the crash.

Where else did real estate crash? Japan. Prices falling for the last 20 years, more or less. Couldn't happen here though. This is America. Stocks and homes go up over the long run.

I hear this argument all the time. It makes sense.

And Its wrong. The market could (not predicting it will) be cut in half from here. Its possible to have deflation in some asset classes and inflation in others. Stocks can decrease while gold increases or vice versa. Inflation and deflation often occur simultaneously.
Hedge your bets and consider the possibility.

Oct 08 04:02 PM

[EconoMike:]

I am surprised to see so many bearish comments. A prediction of 7 percent a year return (including dividends) is not unrealistic. I have to wonder if many of the people who are putting down the prediction got out of the market in March 2009 and cannot come to grips with the fact that they will never get a chance to buy back in at that level!

Oct 09 10:21 PM