“Chances are good that the Dow Jones Industrial Average will finish the year above 15,000—and the odds are 50-50 it could approach 18,000 by the end of 2014.
Did the Dow Jones Industrial Average really hit new highs last week? Practitioners of the dismal science might answer: Not so fast. When the value of an asset rises more slowly than the rate of inflation, then in economic parlance, real gains should be distinguished from nominal. In real terms, a Dow of more than 15,651.80 would have been required for the average to exceed its October 2007 peak.
Inflation was one reason Barron’s called its own forecast “conservative” when it put the odds last February at seven chances in 10 that the Dow would reach 15,000 by year-end 2013 (“Enter the Bull,” Feb. 13, 2012). The story also spoke of Dow 17,000 occurring in the same two-year time frame—a less conservative target, but with a 50-50 shot. Both those targets, with the assigned probabilities, remain relevant for 2013, since they are based on patterns of market history that still apply.
Even with the Dow reaching a nominal record of 14,329 last Thursday, the performance of the market over the past five years is still below par. That bodes well for the bulls. Lower-than-average returns over five years are generally followed by higher-than-average returns over the following two years.
Accordingly, the Dow has four chances in five that it will be flat or higher by year-end 2014, and a 50-50 chance of approaching 18,000 over the same time frame.
TO SPEAK IN THIS WAY about the odds on future trends in stock prices may sound—well, odd. The probabilities are not as statistically sound as, say, the odds of coming up heads four times in a row on a coin toss. Rather, these market odds are derived from long-term market patterns whose source is University of Pennsylvania’s Wharton School finance professor Jeremy Siegel, author of the aptly titled best seller, Stocks for the Long Run…..”
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