Reconciling Dow 20,000 and the Coming Economic Collapse

August 7th, 2012
in contributors

by Dee Gill, Y-Charts

Editor's note: The charts are one week old (fresh when this article was published by Y-Charts).  Even though the charts are one week out of date the discussion is very long range and does not change with one week of new data.

Forecasting being what it is, it’s not extraordinary to hear one pundit effuse happy talk about the stock market’s fantastic future while another predicts a collapse of all that investors hold dear. But it’s much more enlightening when we get great examples of both extremes in one 24-hour news cycle, as we did last weekend. It shows us how everyone gets to feel righteous.

Seth Masters, chief investment officer at Bernstein Global Wealth Management, spoke out for the optimists in a huge way a week ago by forecasting a Dow at 20,000 within five years. That’s a more than 50% gain, which really goes beyond the dare-to-dream hopes of even the most optimistic investors.

Follow up:

 

^DJI Chart

^DJI data by YCharts

A 50% rise would, by extension, give us Apple (AAPL) at $800, Johnson & Johnson (JNJ) at $100, Google (GOOG) at $910, General Electric (GE) at $30 and Exxon (XOM) at $127, as seen in this stock chart.

AAPL Chart

AAPL data by YCharts

Fox News quickly rebutted with Peter Morici, an economist at the University of Maryland who is not likely to cheer up a party with his predictions. His piece on FoxNews.com was entitled “The coming economic collapse.”

Of course, both men related perfectly reasonable data sets to back their contrary assumptions. Masters points out that getting to Dow 20,000 – or S&P 500 2,000 – wouldn’t require company earnings to perform any better than they have typically in the past. Earnings growth, he contends, could be slightly below the 7% long-term average if share price valuations ticked up only slightly.

Masters views much of the world’s problems today -- the Euro trouble, contracting economies and slower emerging markets, for example -- as temporary setbacks that have caused investors to oversell the market. Investors are acting like the world is about to end, as he put it, when really these problems will eventually be resolved. Meanwhile, he suggests that the poor value of bonds will turn more investors to stocks and help boost share prices.

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

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