The Dow Jones at 25,000?
December 12, 2016
Could the Dow Jones Industrial Average hit 25,000? Some market forecasters are already running numbers and models to see if, in fact, a new world order is developing. Following the liquidity crisis of 2008-2009 the term “New Normal” was coined. This was a world of slower growth with lower return expectations. People spoke openly about having to adapt to this restrictive paradigm. Is it possible that this New Normal is already out of date?
If you are a fan of the Brad Pitt movie World War Z you might be familiar with the “Tenth Man” planning framework used by the Israeli defense department. This approach was developed following the Yom Kippur war, and is intended to prevent decision makers being lulled into a sense of “team think” complacency. The approach is simple – whenever nine people agree, it is the job of a tenth person to challenge that view. Should we be employing Tenth Man thinking to the market right now rather than being worried about the almost daily setting of record highs?
Outside of the box thinking can be hard, but some people are beginning to look at the longer term view of the markets in a different way. A report published this week by Jeffrey Saut of Raymond James suggests that if the new administration gets serious about a cut in corporate tax rates, the results could be startling. The proposed cuts involve a reduction from 35% to 15%. Saut says a 1% cut in corporate tax rates will increase average earnings per share by $1.31. If this is correct, a drop in the corporate tax rate from 35% to 15% would mean an extra $26.20 earnings per share! Estimates for S&P 500 earnings in 2017 have been about $131 a share. Saut’s analysis suggest that this $131 could grow to $157 per share. Applying today’s PE multiple of 17 gets the S&P 500 to a value of 2669 – about 20% higher than today!
Saut is not alone. The University of Pennsylvania has concluded that the proposed fiscal policies could see GDP to grow an additional 1.1% to 1.7%. There are a number of other authors who are challenging the notion that this bull market is unsustainable. Research suggests most bull markets have three legs. Some analysts argue that the first leg of the current bull run was from October 2008 to May 2015, and the second leg began as recently as February 2016.
This bull market has been unusual in its slow, steady rise, but somehow the current world seems different to me. I believe we must all look to the future with as open a mind as possible. I have shared my three rules of investing with you in the past. This is a time where the third rule seems very relevant: “Review your portfolio regularly because the world changes. What used to work may not work going forward.”
Carl Gambrell
