Dow 36,000*

Twenty-two years ago, James K. Glassman, a newspaper columnist, and Kevin Hassett, an economist, laid out the bullish case for U.S. stocks in a book called Dow 36,000. Their forecast drew a lot of attention. At the time, the famed stock market indicator was around 11,000, so the authors were implying that the 30 stocks in the Dow Jones Industrial Average would more than triple in value “soon.” Stocks had been undervalued for years, they asserted, but prices would leap to a new plateau as investors recognized that companies were poised to increase their dividends year after year. Looking at how much money an investor would earn from future dividends, they proclaimed, was a new way of valuing a stock, a measure they termed the “perfectly reasonable price.”

Well, stock prices have been doing pretty well of late, and it’s conceivable that the Dow will hit 36,000 some day soon. But before we hear the bulls bellowing in triumph, it’s worth mentioning a few of the reasons I placed an asterisk on the headline above.

One is that 36,000 isn’t what it used to be. Inflation has raised the Consumer Price Index 58% since September 1999. The Dow would need to be above 17,000 today just to have kept pace with inflation since the book was published. In inflation-adjusted prices, the Dow has not quite doubled since 1999. That’s not too shabby, but it’s a far less buoyant performance than the raw numbers suggest.

Another reason for viewing the numbers cautiously is that this isn’t your grandfather’s Dow. The people who run the average systematically cook the books, adding stocks that look poised for good things and discarding the dogs. Back in 1999, the Dow still was mainly an industrial average: 23 of the 30 companies actually manufactured things. Today, by my count, 14 of the 30 Dow companies aren’t really industrials at all. Over time, tech stocks like salesforce.com and Cisco and financial companies like Visa have been added to the average, while underperformers like General Electric, ExxonMobil, and Alcoa have been dumped. If you had purchased the 30 Dow stocks in 1999 and held them until today, you’d be sorry.

Also, the promised dividend increases have proved nowhere near as reliable as Glassman and Hassett implied. Three of the companies in the Dow average in 1999, General Motors, Eastman Kodak, and Sears Roebuck, ended up in bankruptcy. Their their shares lost all value, and their dividends proved not to be a reliable source of income.

As I explain in The Economist Guide to Financial Markets, there is no ideal measure of stock market performance. Each of the many available averages and indexes tells a different story. The Dow Jones Industrial Average is among the least meaningful. So when the Dow hits 36,000, as it inevitably will, I wouldn’t break out the champagne.

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