New Dow Milestones to Watch for

Could the Dow double in 10 years?


After months of some very public hand-wringing in the investment community, the Dow has finally hit 10,000. So now what? To take the edge off of the anticlimactic feeling that accompanies the achievement of a long-awaited goal, here are some new milestones to watch for:

A Dow 20,000. According to Neil Hennessy, the president of the California-based Hennessy Funds, the Dow Jones Industrial Average could double sooner than you might think. Hennessy recently stirred the pot in the investing world when he predicted that the Dow would hit 20,000 within the next 10 years.

With the Dow now past the 10,000 threshold, Hennessy is sticking with his forecast, arguing that slow and moderate growth over the next several years will push the Dow steadily upwards. "It's going to be sustainable growth, and companies' earnings are going to surprise everybody," he says. "Any incremental increase in revenue right now is going to fall to the bottom line."

While Hennessy foresees some "boom and bust" in emerging markets, he says that this volatility shouldn't get in the way of the Dow "at least" doubling. "I think in the next 10 years we're in for a nice, sustainable market, just like we saw in the early '80s, because people learned their lesson about leverage," he says.

According to Seeking Alpha, in order for Hennessy's prediction to come true, the Dow would need to climb 7.2 percent annually.

A third phase. Not all analysts are hanging their hats on a numeric prediction. "I think it's somewhat misleading when you start throwing 20,000 Dow numbers at some specific date in the future," says Mike Ryan, the head of Wealth Management Research at UBS Americas. Ryan says that "we focus more on what the drivers of recovery will be and what the fundamentals are in the equity markets."

For him, the real milestone will be the ushering in of a third phase of recovery. "The first phase of recovery was merely an absence of bad news. . . . The second phase of this has now been about incrementally better news about the economic recovery process," Ryan says. "I think in order to see the recovery cycle extend from here, there needs to be a third phase, and it has to be earnings driven."

The "so what?" factor. The Dow 10,000 had all the makings of a milestone. Investors had been there before, so it was a symbolic bridge to recross on the way to recovery. And with the Dow lingering in the 10,000 ballpark for so long, it was tangible and even alluring. "Ten thousand is just a nice, noticeable number," says Paul Kasriel, the chief economist at Northern Trust.

But now what? For starters, there's the chance that as the government comes off of its spending binge, a burgeoning Dow could owe a chunk of its growth to inflation. Still, Ryan finds this unlikely, at least in the near term. "We don't think inflation is going to be a major issue for the next several years. In fact, I still think that the bigger risk or challenge for most sectors of the economy is going to be deflation," he says. "But once you get past the early stage of recovery . . . I do think that there could be a problem with inflation down the road."

And then there's the fact that celebrations for the 10,000 milestone have been tempered by a still weak economy. But perhaps the real milestone, analysts say, is an acknowledgement that the worst-case scenario did not materialize.

"A year ago, people felt that there was a strong likelihood that we might be entering an economic and financial environment like the early 1930s, and now they're pretty convinced that the worst is not going to occur and that an economic recovery is underway," says Kasriel.