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A new position paper by Seth J. Masters, chief investment officer of Bernstein
Global Wealth Management, entitled “The Case for the 20,000 Dow” is startling. Masters maintains that the odds Dow will rise by more than 7,000 points – an increase of more than 50% – by the end of this decade are excellent. [Below is his argument for such a lofty expectation.] Words: 715
So says Jeff Sommer in paraphrased and/or edited excerpts from his recent article* in the New York Times entitled “The Long-Term Argument for Dow 20,000″.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Sommer goes on to say, in part:
For long-term investors right now, Masters writes, stocks are a much better bet than bonds. “This argument may seem provocative,” he said in an interview, “but that’s only because market conditions are so unusual, and so many people have become so pessimistic.”
That pessimism is grounded in recent history, he acknowledged. The stock market is extremely volatile now, and stocks are being battered for all kinds of reasons. Take your pick.
- At the moment, major banks are being investigated for rigging interest rates.
- In the United States, the economy has hit a soft patch.
- The government is heading toward the so-called fiscal cliff, with spending cuts and tax increases set to take effect automatically at the end of the year.
- In much of Europe, the economy has been contracting, and the finances and governance of the euro zone are unstable.
- On top of all this, in crucial emerging markets like Brazil and China, economic growth is slower than had been expected.
The above is just a partial list of the factors weighing on the market. Quite often, stocks have been sinking for no apparent reason at all.
Masters is of the opinion that stocks over the next decade may be less risky, in some respects, than the supposedly safe market for United States Treasuries. His underlying argument is that the world has faced dire conditions before, and markets and economies have bounced back writing, “People are acting as though the world is going to end,” he wrote. “It might end, but we think it won’t, and we think that’s no way to live your life.”
It is precisely because bonds are now extraordinarily overvalued and stocks are undervalued, in his view, that he believes the Dow Jones industrial average is likely to reach 20,000 within the next five to 10 years writing, “Our projected stock returns may sound optimistic. They’re not. They are well below the long-term average for U.S. and global equities and based on conservative assumptions about economic and market conditions. Bonds, on the other hand, are unlikely to outpace inflation, because current yields are extremely low.”
Masters projects 8% median annual returns for a diversified portfolio of global and domestic stocks over the next 10 years, versus 2% for 10-year Treasuries. At that rate for stocks, “the Dow could hit 20,000 in five to 10 years,” Mr. Masters continues. “In the same time frame, the S&P 500, a more representative index, could hit 2,000.”
Annual stock market returns of 8% were, until recently, commonplace. At the moment, he concedes, they are not. In an interview he said he was not predicting that stocks would actually rise 8% next year or in any given year but instead was presenting a “range of probabilities” for investment returns. “We don’t know where stocks will go,” he said, “and right now they are likely to be extremely volatile, which could feel very unpleasant.”
BUFFERING that volatility makes sense for risk-averse investors, he writes. Over the short run, for example, a portfolio that would typically contain 60% stocks/40% bonds as a strategic allocation should be ratcheted down to 54% stocks and 46% bonds which should reduce portfolio fluctuations. Eventually, though, he writes, such a portfolio should return to a more typical stock allocation.
Over 10-year periods since 1900, stocks have outperformed bonds 75% of the time, according to Masters’ calculations but today bond prices are relatively high — their yields, which move in the opposite direction, are extraordinarily low — and stock prices are relatively low, so the firm sees the chance of stocks beating bonds over the next 10 years at 88%.
Stocks have been cruel and it is hard to love them right now but, writes Mr. Masters, “We think that 10 years from now, investors will wish they had stayed in stocks — or added to them.”
*http://www.nytimes.com/2012/07/22/your-money/bernstein-strategist-makes-long-term-case-for-a-20000-dow.html?_r=1 (To access the above article please copy the URL and paste it into your browser.)
In response to the above article by Seth Masters, David Rosenberg, the bearish strategist over at Gluskin Sheff, wrote about it this morning (from a post** by Matthew Boesler of www.businessinsider.com).
“Well, this is perfect. It is amazing how many pundits still believe in stocks for the long run. See The Long-Term Argument for Dow 20,000 on page 6 of the Sunday NYT Money & Business section. Shades of Jeremy Siegel.
So what are we left to conclude? The bottom line is that from the spring of 2009 to the spring of 2011, the stock market doubled, and it doubled principally because of a wild short-covering rally in the financials which were priced for insolvency at the lows. It was a classic 1933-1936 bounce that never saw a new high and never foreshadowed better times ahead. The Great Depression ended nearly a decade later and the next secular bull market did not begin until 1954.
From what history teaches us, secular bear phases do not typically end with headlines about 20,000 but rather with contrarian news like The Death of Equities on the front cover of BusinessWeek back in 1979 (or Awash in Oil on the front cover of the Economist back in 1999, when crude prices were turning in their secular lows).
Page six of the business section isn’t as bold as the front page. Nevertheless, the history of media getting it wrong speaks for itself.”
**http://www.businessinsider.com/david-rosenberg-nyt-article-dow-20000-perfect-2012-7#ixzz21ZI2HTpO (To access the above article please copy the URL and paste it into your browser.)
Editor’s Note: The above posts may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
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