Does Dow One Million Make Sense?

Does Dow One Million Make Sense?

James Glassman, author of “Dow 36,000,” is feeling good now, and he’s back with a new forecast. Granted, the 350% gain from the book’s October 1, 1999 publication date (the Dow was 10,300) took twelve years and required riding through rough times. But here we are at 36,000, give or take 1500 points.

This time the 74-year-old Glassman is not being constrained by time. His huge forecast is for the Dow Jones Industrial Average to reach over one million in fifty years.

Here is Glassman’s rationale…

The Wall Street Journal:Get Ready for Dow One Million – The industrial average closed at 825.86 on Nov. 2, 1971. At this rate it’ll hit 1,573,865 in 50 years” By James K. Glassman (Nov. 2, 2021)

“The Dow Jones Industrial Average stood at 825.86 as trading closed on Nov. 2, 1971. It closed Tuesday at 36,052.63. That is almost a 43.7-fold increase. Do the math. If the Dow continues to rise at the same rate, 50 years from now it will be 1,573,865. In other words, Dow One Million.

“Over long periods, an index of U.S. large-cap stocks, as represented by the industrial average or the S&P 500, has risen with dogged persistence, doubling every 10 years or so. The question that’s bothered me for the five decades I’ve been writing about investing is why everyone doesn’t understand this.”

Well, that’s probably the most simplistic forecast we’ll ever see. Certainly, I’ve never read anything like it in my almost six decades of investing. Predict 50 years into the future based solely on one 50-year past result? The stock market exhibits “dogged persistence” by doubling each decade? And where is any mention of inflation’s erosion of value?

“Do the math” – Okay, let’s do that…

Start with Glassman’s 50-year-old starting point. Adjusted for inflation, that Dow 825.86 in 1971 dollars becomes 5,613.37 in 2021 dollars. So, in real terms, the 43.7-fold increase drops to 6.4-fold. That cuts the 1.5+ million 2071 projection to 230,000 – an annualized gain of about 4% per year.

Here’s the 121-year picture of the DJIA as originally reported and then adjusted to 2021 dollars.

Note especially the 1900-1982 real return of 0% So much for using the past to project the future. Doing so forty years ago would have had us investing in U.S. Treasury Bills.

Note: That was the case in the late 1970s and early 1980s. I was handling the asset allocation recommendations and presentations for Callan Associates from 1978 to 1982. At every meeting at least one board member had a stack of papers that “proved” 100% U.S. Treasury bills was the best strategy.

In the table below are the twelve decades of returns and inflation rates since 1900. The results are split between the first five and the latter seven because the years from 1900 to 1949 contained significant structural and philosophical developments affecting the economy, financial system, business environment and governmental operations.

Looking at the 1950-2019 decades, we see the compound average decade return is the doubling (7.3% per year) that Glassman mentions. However, take inflation into effect and that average is cut in half (3.7% per year).

The bottom line: Stock market projections are dicey, so it’s best to ignore them

Read Glassman’s Dow 36,000 book, and it’s clear he missed the mark on why the Dow should rise that much. Moreover, his timing was at the top of the Dow’s run-up. From there, the new-economy/old-economy arguments that supported the Internet bubble upset the Dow’s rise.

Also, projections for any time period are dicey. Better to remember the saying, “I can tell what is likely to happen, I just can’t tell you when.” Nevertheless, the media is about to survey professionals for what’s in store for 2022. As usual most will miss. Fifty years out? Forget about it.