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