Dow 20,000: 5 Reasons Why It’s Inevitable
I have no doubt that the Dow Jones Industrial Average will break 20,000 within the next 36 months.
#-ad_banner-#I don’t say this lightly. This prediction is based on solid evidence, historical precedent and personal experience.
The fundamental and technical pictures of today’s stock market are screaming for prices to push above psychological resistance at 20,000.
You might recall that in the days after the dot-com bust, the 10,000 level was a source of concern and trepidation among investors — but after breaking through that barrier in late 2003, the Dow pushed another 4,000 points higher over the next few years.
The second largest correction of all time (in percentage terms) started in October 2007. The Dow plunged over 50% from the highs to just below 7,000 in January 2009.
In hindsight, this extreme correction had to happen. It was the result of an overheated economy fueled by lackadaisical lending policies for residential real estate. When this bubble finally burst, it took down the entire economy as investors lost faith in financial institutions and the market itself.
Readers often laugh when told that things are different this time… but things really are different this time.
The stock market has been pushing to new highs since the pullback in January — but in contrast to the housing bubble, this bull market has at least five pillars of fundamental support.
Yet despite the market’s stellar recent performance, many pundits (like Marc Faber, author of the “Gloom, Boom & Doom” report) continue to push a bearish agenda. The funny thing is, while these pundits are urging investors out of stocks, the bulls are raking in profits as the market climbs higher.
Here are the five reasons I think the Dow will hit 20,000:
| 1. No Euphoria In The Stock Market |
| Every severe stock market correction has been preceded by extreme bullish sentiment — and right now, the investing public is worried about the next correction, if anything. The reason that investor euphoria is a clear sign of a stock market top can be seen in a simple dynamic: Once everyone is in the stock market (because they’re bullish), there isn’t enough money left to push stocks higher. Once a little negative news starts to seep in, the selling starts… but because most everyone is already invested, they can’t buy stocks at the discounted prices… which further accelerates the downtrend. As of June 13, short-term stock investor sentiment was balanced at exactly 50% between optimism and pessimism, according to advisory group SentimenTrader. At the same time, long-term sentiment was 70% optimistic, well below the extreme levels typical of the end of a bullish stock market. My own decidedly non-scientific research involves tracking Google trends of search terms:
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| 2. Growing Household Wealth |
| The Federal Reserve recently reported that the net worth for households and nonprofit groups increased to $81.8 trillion in the first quarter — up from its pre-recession peak of $68.9 trillion in the second quarter of 2007. So what does this mean? The combination of the great advances in U.S. wealth and the relative lack of public interest in the market, despite the increase in asset value, reveals two things: First, there is a tremendous amount of wealth that remains to be invested in the stock market, and second, as the market climbs higher, the public’s interest should increase, attracting more money over time and driving stocks higher. |
| 3. Government Support |
| The Fed, of course, wields great control over the U.S. economy — and never before has the economy enjoyed so much active support from the nation’s central bank. The Fed is continuing its accommodative low-rate policies and will most likely provide notice of any changes well in advance. The Fed has a vested interest in not sending any shock waves into the market that could cause a sharp correction. |
| 4. Growing Corporate Profits |
| Corporate profits have climbed to their highest level in at least 85 years. Last year, corporations earned $2.1 trillion, with after-tax profits of $1.7 trillion — equal to 10% of U.S. GDP. In addition, corporate taxes have been trending lower for years. The effective rate has been below 20% in three of the past five years. These tailwinds are providing companies with more money to spend on R&D, marketing… and most importantly, dividends and growth. |
| 5. Improved Overall Economic Numbers​ |
| Boosted by the Fed’s helpful hand, the U.S. economy is improving in a slow and steady manner. We are not witnessing any extreme upward moves in the traditional economic numbers that could indicate a bubble. The Fed’s latest Beige Book survey indicates that the U.S. economy has been strengthening in sectors as diverse as manufacturing, construction, retail sales and bank lending. Growth in all of the Fed’s dozen regions was reported as either moderate or modest. |
Risks to Consider: Despite the evidence that the bull market will continue, investors have to always be alert for “black swan” events that could shock the market into a sharp correction. If something like this occurs, you can toss my analysis out the window.
Action to Take –> Investors should stay invested in the stock market and ride this bull market higher. I’m not saying there will not be any profit-taking pullbacks between here and 20,000 — but rather than being fearful, the smart money will likely be using these pullbacks as buying opportunities.
Is it possible to ignore the financial media, say goodbye to your broker — and still make money in the market this year? The answer is absolutely. Our research shows that you can find a winning investment roughly 85% of the time and see returns of 18% in two weeks… 43% in nine months… 58% in 11 months — All while glancing at the market just 12 minutes per month. Follow this link to learn how.