Dow 20,000

Christian DeHaemer

Updated May 7, 2013

All major stock market indices in the United States are hitting new highs.

The S&P 500 crested 1,600 for the first time ever. The Dow Jones Industrial Average is looking to move solidly over 15,009. The NASDAQ remains well off its dot-com highs above 5,000, but has more than doubled from its 2009 lows.

It makes one think 20,000 on the Dow isn’t all that far off.

Heck, the Dow has moved up more than 33% in a year ten times in its long life. In 1915 alone the Dow went up 81.66%, and it climbed 25.32% for the year as recently as 2003.

So a 25% climb — though rare — isn’t really out of the ordinary…

In fact, we are due.

Dow 1,000

The graybeards tell me back when the Dow first crossed above 1,000, it sold off and took 5,168 days before it hit that magical number again.

I remember back in the late 90s when it was approaching 10,000… The media was in full screech mode regarding the mythical line in the sand the 10,000 number represented. It would undoubtedly result in doom for investors.

The market then gained another 1,000 points.

As you can see by the chart, once markets start crossing major market marks, they tend to keep hitting more 1,000-point marks.

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This market has inertia. It will keep grinding higher — until it is stopped.

Bump and Grind

Don’t get me wrong; there are a lot of negative data points — from employment to food stamps to PMI…

China is slowing and Europe is stagnating.

But there are bright spots, too. For example, the Mexico Fund has tripled in the last four years. Mexico is the United States’ third largest trading partner. Something must be going right. And other data points like housing and employment seem to be bouncing off the bottom (or at least they have stopped plummeting)…

Remember, the market looks forward — not back. It prices in what it thinks will be the situation on the ground six months from now.

It is interesting that the three best-performing sectors of the first quarter are health care, consumer staples, and utilities.

Health care is up due to new advancements and drugs as well as the hard deadline to establish ObamaCare requirements. Consumer staples are up because people are buying more; and utilities go up when costs drop and sales increase. This would suggest more manufacturing.

We know auto sales are strong as people replace their old, worn-out cars.

Or it could just be investors moving from the sidelines into the most defensive sectors. If the economy continues to expand, they will move up the risk ladder into technology.

Profits Hit Record

In Q4, 2012, corporate pre-tax profits hit a record high of $2 trillion, including 681.4 billion in profits earned abroad.

For 2013 S&P 500 earnings are expected to be $125.45 per share, up 11.7% from $112.30 last year. A P/E of 15 on that earnings would put the S&P 500 at 1,875 by the end of the year. That’s a 17% jump over current levels.

Don’t forget, the past five years have made most surviving companies lean and mean. There’s not a lot of fat that hasn’t been cut. They have plenty of cash to put to work at the first whiff of opportunity, or they can buy up other companies, as well as their own stock.

If I Were a Rich Man

Furthermore, every central banker in the world is printing money.

The Japanese and the Europeans have just ratcheted up their spending. China is expected to toss another stack of RMBs on the fire shortly. The “don’t fight the Fed” mantra is now a global phenomenon.

Lastly, I’m starting to get the feeling that the “Sell in May and go away” trade has gotten a bit crowded this year. There are so many people short or waiting to buy the next dip that they may not get the chance.

Any talk of bullish macro ideas will eventually lead you to Dr. Ed Yardeni.

I found this today on his blog. He is talking about the risk/reward metrics of putting your money in bonds, or putting it in equities:

Rules of 20. The Rule of 20 compares the forward P/E of the S&P 500 to the difference between 20 [year bond] and the CPI inflation rate on a y/y basis.

Currently, it shows that the P/E should be 18.5, well above the market’s current P/E of 14. That would put the S&P 500 at 2133, or 32% above Friday’s close.

It is obvious to me that after getting burnt twice in the last 13 years in equities, the majority of investors think bonds are safer. They are wrong. This is akin to everyone rushing to the safe side of a canoe: When one side approaches a cataract, it tends to tip it over the other way.

All in all, the general market doesn’t feel overinflated. Sure, we could get a 10% pullback at any time, for any number of reasons. But on the flip side, if we get a positive employment or housing starts number the market could put on 10% in a very short time. I can’t remember the last 100-point Dow day…

Psychologically speaking, there is no way this feels like a market top. There is no euphoria.

I haven’t had a stock tip from a taxi driver in five years. In fact, small speculative stocks can’t get a bid, even if they’re making money.

No, sir. It may take a few years, but Dow 20,000 and S&P above 2,100 don’t seem like a reach at all.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.

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