Here’s why the Dow will hit 40,000 by 2025

Advisors


First, let’s be clear: The current bull hasn’t been running as long as most people think. The popular belief that the current bull started in March 2009 is contradicted by the more than 20 percent dips in many indices that occurred between 2015 and Feb. 11, 2016 — arguably, the actual start of a new bull market, after the one that started in 2009 had run out of gas, according to data from Ned Davis Research. (Under criteria from Davis, there have been 37 bull markets since 1900, with an average length of 25 months.) So if you’re a member of the how-long-can-it-go club, be duly apprised: This bull market hasn’t really run that long.

Pessimistic professionals speak in doomsday tones to the accepting ears of investors whose wounds from the financial crisis still haven’t healed. These people remain fearful of a repeat of the financial crisis of 2008, so talking about signs that economic growth will probably continue for years rubs salt in their wounds. Think back to the fall of 2014, when some advisors (myself among them, in a published article) predicted that the Dow would hit 20,000 by the end of 2015.

Until this prediction came true, many regarded it as the audacious predicting the outrageous. Well, Dow 40,000 by 2025 is actually no less outrageous. Some might call it irrational exuberance. But for some undeniably valid economic reasons, this view may not even be exuberant — just rational.

Amid all the headlines about the U.S. economy’s current robust state, it’s easy to lose sight of three things:

  1. How badly the economy was brutalized by the Great Recession, the deepest in U.S. history. Looking back, some economists have said that it was a gnat’s whisker away from being a depression. Nerdy technical measures aside, it was just plain bad.
  2. Though the economy has since come a long way, preceded and then accompanied by strong stock market growth, it still has a long way to go to resemble any kind of historical normalcy. Amid the din of ballyhooing about the “new normal,” it’s important to remember that economic history repeats itself or, at least, rhymes.
  3. Just how little a stock market propelled by the economy’s continuation of this journey would have to grow above current levels for the DJIA to reach 40,000. To get there by December of 2025, the index price needs to rise only 6.75 percent (not including dividends) annually — less than the postwar average of 7.2 percent.

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These factors demonstrate the jumping-off point for economic growth driving market gains:

High, unmet residual demand for housing. The U.S. economy perennially relies on housing construction, a stimulus fueled by annual demand for about 1.5 million new housing starts. Since 2009, there have been about 8.5 million starts — some 5.5 million short of the 13.5 million needed for that period. Pent-up demand is still releasing as Gen Xers move out of their parents’ basements and families seeking to buy rather than rent (and Gen Y folks move into their apartments). And even as this demand is satisfied, we’ll still need another 1.5 million starts each year to keep up with trend demand.

Leading economic indicators that continue to point north. These indicators usually start declining several months before a recession. There’s little reason to believe that the upward trend through May will reverse, considering the slow but steady progress of the recovery thus far.

Rising consumer confidence. The University of Michigan’s gauge of consumer sentiment — which measures views of personal financial wherewithal against the favorability of conditions for buying durable goods — increased to 99.3 in June of 2018 from 98 in May, exceeding market expectations of 98.5 — the highest in three months in a year marked by far more positive sentiment measurements than in 2017. This sentiment is expected to remain high amid declines in unemployment.

Strong current and projected corporate capital spending. The late 2017 tax cut continues to fuel high levels of corporate investment and potential growth. In mid-June, the Atlanta Fed’s GDPNow model, which weighs various current gross domestic product components, predicted 4.6 percent national GPD growth for this quarter. And first-quarter corporate capital spending rose 21 percent year-over-year, on track to be the highest year-over-year growth since 2011. These historically high numbers are expected to rise for the year as companies execute spending plans now under development.



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