Dow Jones 10,000, Here We Come

by Michael Lombardi, CFP, MBA

Last month, I went on a limb when, as the stock rally was faltering, I predicted the Dow Jones Industrial Average would march on to the 10,000 level. My contemporaries here in the office thought I had lost it. And some of my most loyal readers called in politely suggesting that I get a tune-up for that old brain of mine.

Well, here we are. The Dow Jones is only 372 points away from reaching my 10,000 target. So, why, when most analysts were warning investors about the traditionally rocky months of September and October, was I predicting that the stock market rally had more life left in it?

Here is why I believed stock prices would go higher when I predicted Dow Jones 10,000 last month and why I still believe stocks have more room to move higher:

  • Given the shock consumers, investors, businesses, the government, and the financial system have taken over the past 24 months, valuations mean very little right now. We are still dealing with the “fear” factor. And the stock market loves to climb a wall of worry.
  • The amount of fiscal and monetary stimulus in the economy today is unprecedented. We will likely never see it again. Large corporations are able to borrow money for rates under three percent. The fat at these big American companies has been trimmed. And companies are starting to make money again.
  • The Dow Jones Industrial Average fell like a rock from 14,164 in October 2007 to 6,440 on March 9, 2009. Drops in stock prices of that magnitude are always followed by equally as impressive rebounds. If the stock market was to regain 50% of its loss, the Dow Jones Industrial Average would trade at 10,300. From my studies, and as I have written before, a 50% retracement of a stock index’s sudden and sharp loss is often the norm.
  • There is still too far pessimism in the market place. The bear cannot take more of people’s money until it first lures investors back into the stock market.

Once the Dow Jones is well above 10,000 and investors are again feeling good about the stock market and the economy (and the belief that the worst is behind us is most prevalent), that’s when the bear market will take the carpet out from under us again. But, for now, and since March 9, 2009, it’s been a great ride up to enjoy.

Michael’s Personal Notes:

My condolences to the thousands of families that were affected by the dire events that took place eight years ago today. Time goes by quickly. September 11, 2001, seems so long ago now. But for the families that lost loved ones that day, the pain continues. Yes, America is stronger now than it has ever been. More vigilant, more aware. But that will never bring back the thousands of beautiful people that lost their lives because of the terrorist attacks, most by simply following their daily routine. May their families find continued strength.

Where the Market Stands:

The Dow Jones Industrial Average is now up 9.7% for 2009. Most retail investors and money manager have missed the sharp advance the stock market has delivered from its low of March 9, 2009. See my lead article above. I believe that a level of 10,000 for the Dow Jones Industrial Average is in the cards.

What He Said:

“The Real Threat to the Economy: U.S. retail sales are falling, the producer price index is crashing, house prices, car prices are all falling — and no one is talking about deflation but me. Fed governors are still talking about inflation – they’ve got it wrong. There’s no need for me to get into the dangers of deflation, as I’ve written about them (many times) before. Let’s just put it this way: Deflation is about the worse economic state a country will experience. The risks to the U.S. economy in 2007 are greater than I’ve seen in years. Michael Lombardi in PROFIT CONFIDENTIAL, November 15, 2006. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in the worst state of deflation since the Great Depression.