Saturday, February 2, 2013

Stock Market: Dow 20,000

Yesterday the Dow Jones hit the mark 14,000. It`s just a matter of time till this gauge will reach the mark 20,000. This would be a rise of 42%.

The future will tell how long it took. The timespan depends - of course - on how fast the stocks rise. Since its start in the year 1896 the Dow climbed on average around 7% annually (wikipedia). If the Dow would follow the historical (long time) pattern the gauge would need (considering the compound interest effect) around 5 years and would reach mark 20,000 in summer 2018.

But it could go much faster. Since spring 2009 - the start of the recent rally - the Dow gained a bit more than 20% per year. If the Dow could continue this pace the gauge would need just 2 years and could reach the target 20,000 as soon as the year 2015!

And in the last 12 months the stock market climbed around 10% against strong headwinds like the Euro crisis and less US government spending. By keeping this speed the Dow would need less than 4 years.

I reckon that we don´t have to wait too long for Dow 20,000. My optimism is based on the following assumptions which I assume as highly likely:

1. China and other emerging markets will continue their catching-up processes and deliver high growth rates generating fast rising exports and revenues for US and European companies.

2. The ongoing technological revolution - including advances in the software & Internet industries and the rising use of robots - will further strengthen the efficiency of the companies and translate in continuously & swift rising profits.

3. The current austerity policy (less government spending) in the US and Europe will lead to much leaner economies and less 
bureaucracy giving way for more private enterprise which should rekindle global economic growth.

4. Investors are sitting on huge cash reserves world wide which could flow back to the stock market.

Hence I believe that the stock market rally could at least prolong the tempo of the last 12 months for some years and the Dow could reach the mark 20,000 through the end of 2017.

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